Gross Domestic Product Preliminary Estimate: Q4 2014

• Change in gross domestic product (GDP) is the main indicator of economic growth. GDP is estimated to have increased by 0.5% in Q4 2014 compared with growth of 0.7% in Q3 2014.

• Output increased in two of the four main industrial groupings within the economy in Q4 2014. In order of their contribution, output increased by 0.8% in services and 1.3% in agriculture. In contrast, output decreased by 1.8% in construction and 0.1% in production.

• GDP was 2.7% higher in Q4 2014 compared with the same quarter a year ago. GDP in 2014 as a whole was up 2.6% on 2013.

• In Q4 2014 GDP was estimated to have been 3.4% higher than the pre-economic downturn peak of Q1 2008. From the peak in Q1 2008 to the trough in Q2 2009, the economy shrank by 6.0%.

• The preliminary estimate of GDP is produced using the output approach to measuring GDP. At this stage, data content is less than half of the total required for the final output estimate. The estimate is subject to revision as more data become available, but these revisions are typically small between the preliminary and third estimates of GDP.

• All figures in this release are seasonally adjusted.

About the preliminary estimate of GDP

Change in GDP is the main indicator of economic growth. The preliminary estimate of GDP is based solely on the output approach to measuring GDP and uses the same data that feed into the Index of Services, Index of Production, and Output in the Construction Industry datasets. The growth estimates within this release are created from short-term measures of output and should be considered alongside medium and long-term patterns in the series to give a more comprehensive picture of the key movements (further information on longer-term patterns of GDP, including a comparison with other countries, can be found in the Economic Context section).

The output approach measures gross value added (GVA) at a detailed industry level before aggregating to produce an estimate for the whole economy. GDP (as measured by the output approach) can then be calculated by adding taxes and subtracting subsidies (both only available at whole economy level) to this estimate of total GVA. However, as there is no information available on taxes and subsidies at this stage, the quarterly growth for output GVA is taken as a proxy for GDP growth (more information on creating the preliminary estimate of GDP is available on the Methods and sources page of the ONS website).

In the Second Estimate of GDP and the Quarterly National Accounts the output GVA and GDP estimates are balanced with the equivalent income and expenditure approaches to produce headline estimates of GVA and GDP. Further information on all three approaches to measuring GDP can be found in the Short Guide to National Accounts (136.8 Kb Pdf).

All data in this bulletin are seasonally adjusted estimates and have had the effect of price changes removed (in other words, the data are deflated). Further information on some of the key concepts (including seasonal adjustment and deflation) underlying the estimates can be found in background note 8.

The quality of the estimate of GDP

The preliminary estimate of GDP is produced around 25 days after the end of the quarter to provide a timely estimate of GDP and at this stage the data content of this estimate is around 44% of the total required for the final output based estimate. The methods for producing the preliminary GDP estimate use monthly data for the first two months in the quarter (October and November) and forecasts for estimating the third month (December). More information about the data content for this release can be found in the Assumptions made for December 2014 section and the background notes. Revisions are an inevitable consequence of the trade-off between timeliness and accuracy. The estimate is subject to revisions as more data become available, but between the preliminary and third estimates of GDP, revisions are typically small (around 0.1 to 0.2 percentage points), with the frequency of upward and downward revisions broadly equal.

All estimates, by definition, are subject to statistical uncertainty and for many well-established statistics ONS measures and publishes the sampling error associated with the estimate, using this as an indicator of accuracy. The estimate of GDP, however, is currently constructed from a wide variety of data sources, some of which are not based on random samples and as such it is very difficult to measure the sampling error. While development work continues in this area, like all other G7 national statistical institutes, ONS does not publish a measure of the sampling error associated with GDP (more information on the quality of the output approach to measuring GDP can be found on the Methods and sources page on the ONS website). It should be noted that ONS is continually working on methodological changes to improve the accuracy of the output approach to measuring GDP (more information can be found on the Improvements web page). As part of the GDP Continuous Improvement Programme, articles are regularly published on the ONS statistical continuous improvement page, which provide detailed updates of the work carried out so far.

The preliminary estimate of GDP focuses on the growth in output between two consecutive quarters (in this release Q3 2014 and Q4 2014). GDP increased by 0.5% in the fourth quarter of 2014, with two of the four main industry groupings showing an increase.

The contribution an industry grouping makes to GDP quarterly growth is dependent on the change in that industry grouping and its weight within the output approach to measuring GDP. The current 2011 based weights are: services 78.4%; production 14.6%; construction 6.4%; and agriculture 0.6%.

The largest contribution to Q4 2014 GDP growth came from services; these industries increased by 0.8%, contributing 0.62 percentage points to the increase in GDP (as seen in Figure 1). This followed an increase of 0.8% in Q3 2014. In the latest quarter there was widespread growth, with increases in three of the four main services aggregates (distribution, hotels & restaurants; transport, storage & communication; business services & finance). Output from government & other services was flat for Q4 2014. Growth in each of the main services aggregates was lower than in Q3 2014 with the exception of distribution, hotels & restaurants which grew by 1.3%, following a rise of 0.7% for Q3 2014. Retail made the largest positive contribution to the increase. In Q4 2014 output from services was 7.9% above its pre-economic downturn peak in Q1 2008.

There was a downward contribution (0.02 percentage points) from the production industries; these industries fell by 0.1%, with energy supply decreasing by 2.8% reversing an increase of 2.8% in Q3 2014, and mining & quarrying decreasing by 0.6% following a decrease of 1.6% in Q3 2014. The decrease in energy was mainly caused by a decrease in the manufacture of gas. Partially offsetting these decreases was a rise of 1.2% in water & waste management, following a decrease of 0.3% in Q3 2014, and a rise of 0.1% in manufacturing following an increase of 0.3% in Q3 2014.

Construction output decreased by 1.8% in Q4 2014 when compared with Q3 2014, contributing -0.11 percentage points to GDP growth and follows a rise of 1.6% in Q3 2014. Compared with the previous month, November 2014 saw a dip in construction output of 2.0%, following a fall of 1.9% in October 2014. Early responses for December 2014 indicate a rise into December.

As seen in Figure 2, GDP in the UK grew steadily during the 2000s until a financial market shock affected UK and global economic growth in 2008 and 2009. Economic growth resumed towards the end of 2009, but generally at a slower rate than the period prior to 2008 (Figure 2). This growth was also erratic, with several quarters between 2010 and 2012 recording stagnant or declining GDP. This two-year period coincided with special events (e.g. severe winter weather in Q4 2010, the Diamond Jubilee in Q2 2012) that are likely to have affected growth. Since 2013, GDP has grown steadily, passing its pre-downturn peak in Q3 2013.

Figure 3 shows the annual (year-on-year) growth. The chart clearly shows the impact of the most recent economic downturn in 2008/09. Since then GDP growth has been slightly below what was observed in the period before the downturn, with the estimated 2.6% increase in annual growth in 2014 representing the strongest year-on-year growth since 2007, when it was also 2.6%.

Figure 4 shows the industry breakdown of GDP from 2001. Up until the downturn, services in the UK grew steadily, while production output was broadly flat over the same period. Construction activity grew strongly from 2001 to 2003, and although there was a temporary decline in the mid-2000s, this was reversed by the end of 2007.

GDP and all of its components are referenced to 2011, making the average index in 2011 equal to 100. It is for this reason that Figure 4 shows all components converging in 2011.

Industries have shown differing trends following the recent economic downturn. This is illustrated in Figure 5, which shows the path of GDP and its components (excluding agriculture, but including manufacturing which is a sub-component of production) relative to their level in Q1 2008. The construction and production industries were more acutely affected by the deterioration in economic conditions. Following the downturn, the services industries generally grew steadily, albeit slowly, with output exceeding its pre-downturn peak in Q3 2011.

Production and construction activity began to grow in 2010 - with manufacturing showing particular strength – but neither industry sustained this growth. Production output fell in both 2011 and 2012, falling below levels seen at the height of the downturn in 2009. As long-term economic uncertainty acted as a deterrent on investment, construction output sharply decreased in 2012, and was close to its 2009 trough after further contraction in Q1 2013. However, clear improvement in construction has been seen in 2014 with output in 2014 6.0% higher than 2013. Although there has been widespread growth across all major components of GDP since the start of 2013, the service industries remain the largest and steadiest contributor to economic growth (Table 1), and the only component of GDP where output has exceeded its pre-downturn peak.

The ONS preliminary estimate of GDP is one of the earliest GDP releases to be published internationally. As a result, comprehensive cross country GDP comparisons cannot yet be made for Q4 2014.

However GDP data are widely available for most major economies up to the third quarter of 2014, and a comparison of this information is shown in Figure 6. Each country has been indexed to Q1 2008 so that a comparison of recoveries since the global downturn can be made between countries. Cross country GDP data are publicly available from the Organisation for Economic Co-operation and Development (OECD).

The level of GDP in the UK took until Q3 2013 to surpass its pre-downturn peak. Figure 6 indicates that the UK recovery took longer than some other countries in the G7. This is in part due to the nature of the downturn in the UK; GDP fell to a greater extent and as a result has taken longer to recover.

European economies have continued to struggle since the euro area sovereign debt crisis in 2011, with Italy particularly affected. In Q3 2014, GDP growth in France was positive at 0.3% after two consecutive quarters of either flat or negative growth. Meanwhile, GDP had returned to positive growth in Germany of 0.1%, while Italy continued a negative trend. Quarter-on-year growth in Italy has been negative for 12 consecutive quarters, between Q4 2011 and Q3 2014 inclusive.

GDP in Japan fell by 1.7% and 0.5% in Q2 2014 and Q3 2014 respectively. This is likely to reflect the previously announced increase in consumption tax which came into effect in April 2014, which encouraged consumers to make major purchases before the increase (Q1 2014 growth was positive at 1.4%). Consumer spending only increased by 0.4% in Q3 2014, after falling 5.2% between Q1 2014 and Q2 2014.

Agriculture

Agriculture output increased by 1.3% in Q4 2014, following an increase of 0.5% in the previous quarter. Between Q4 2013 and Q4 2014, agriculture output increased by 2.1%.

Production

The Index of Production decreased by 0.1% in Q4 2014, following an increase of 0.2% in the previous quarter. Energy supply contributed the most to the decrease, contracting by 2.8%. Between Q4 2013 and Q4 2014, production output increased by 0.7%.

Construction

Construction output decreased by 1.8% in Q4 2014, following an increase of 1.6% in the previous quarter. Between Q4 2013 and Q4 2014, construction output increased by 3.5%.

Distribution, hotels & restaurants

The index for distribution, hotels & restaurants increased by 1.3% in Q4 2014, following an increase of 0.7% in the previous quarter. Retail made the largest positive contribution to the increase. Between Q4 2013 and Q4 2014, distribution, hotels & restaurants output increased by 4.7%.

Transport, storage & communication

The index for transport, storage & communication increased by 1.1% in Q4 2014, following an increase of 1.2% in the previous quarter. Computer programming, consultancy & related activities made the largest contribution to the increase. Between Q4 2013 and Q4 2014, transport, storage & communication output increased by 4.5%.

Business services & finance

The index for business services & finance increased by 0.9% in Q4 2014, following an increase of 1.0% in the previous quarter. Architectural & engineering activities made the largest positive contribution to the increase. Between Q4 2013 and Q4 2014, business services & finance output increased by 4.0%.

Government & other services

The index for government & other services showed no growth for Q4 2014, following an increase of 0.2% in the previous quarter. The largest positive contribution came from human health activities, while the largest negative contribution came from libraries, archives, museums & other cultural activities. Between Q4 2013 and Q4 2014, government & other services output increased by 1.0%.

Background

The methods for producing the preliminary GDP estimate use monthly data for the first two months in the quarter and forecasts for estimating the third month. The forecasts are reinforced by early responses to the ONS Monthly Business Survey (MBS) but the monthly response rate is generally lower at this stage (typically between 30 and 50% at this point in time).

Each of the first two months includes monthly data from the MBS of 44,000 businesses, covering the production, manufacturing, services, retail and construction industries.

The forecasts for December use the standard ONS method of fitting an autoregressive integrated moving average (ARIMA) model with adjustments made for Easter, trading days and outliers. The forecasts are calculated for each individual industry level series (for example, food & beverage services). More information on creating the Preliminary Estimate of GDP is available on the Methods and Sources page.

Purpose of this section

This section provides details of the assumptions made for December 2014 for each of the main components of the output approach to measuring GDP: services, production and construction.

It was estimated that there was a 0.4% rise in the output of the services industries between November and December 2014.

At the more detailed level, it was estimated that distribution, hotels & restaurants rose by 0.4%, transport, storage & communication rose by 0.4%, business services & finance rose by 0.5%, and government & other services rose by 0.1%.

The services data for October and November 2014 used in the calculation of the Q4 2014 gross domestic product preliminary estimate are consistent with the data contained in the November 2014 Index of Services release, published on 27 January 2015.

It was estimated that there was a decrease of 0.4% in output of the production industries between November and December 2014.

At the more detailed level, it was estimated that there were decreases of 0.1% in manufacturing and 2.7% in mining & quarrying. It was estimated that energy supply increased by 0.6% and water & waste management increased by 0.2%.

Small revisions (following revised seasonal factors allowing for the addition of December data) to the October and November 2014 estimates, published in the latest Index of Production (IoP) release on 9 January 2015, have been used in the calculation of the Q4 2014 gross domestic product preliminary estimate. To retain coherence between the published monthly and quarterly indices for Q4 2014, small adjustments have been made to the monthly growth rates for December 2014 for total production, mining & quarrying, energy supply and water & waste management. This ensures that if the monthly growth rates for December are applied to the published November 2014 indices for total production and the main components (and then an average taken of the October, November and December 2014 indices), the results are consistent with the published quarterly indices.

Monthly data for the construction industries are only available from January 2010.

The forecast for construction is calculated slightly differently to production and services due to the shorter time span of monthly turnover data. More weight is placed on early responses to the MBS for December. Responses from businesses were the starting point to inform the forecasts; this was then adjusted (using information collected in previous months) in recognition that these early responses from businesses tend to be lower than later responses. This approach led to an estimated 1.8% fall between October and December 2014.

Small revisions (following revised seasonal factors allowing for the addition of December data) to the October and November 2014 estimates, published in the latest Output in the Construction Industry - November 2014 release on 9 January 2015, have been used in the calculation of the Q4 2014 gross domestic product preliminary estimate. To retain coherence between the published monthly and quarterly indices for Q4 2014, small adjustments have been made to the monthly growth rates for December 2014 for construction output. This ensures that if the monthly growth rates for December are applied to the published November 2014 indices for construction output (and then an average taken of the October, November and December 2014 indices), the results are consistent with the published quarterly indices.