Second estimate of GDP: Quarter 4 (Oct to Dec) 2016

• UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.7% between Quarter 3 (July to Sept) 2016 and Quarter 4 (Oct to Dec) 2016, revised up 0.1 percentage points from the preliminary estimate of GDP published on 26 January 2017. Upward revisions (due to later data received) within the manufacturing industries is the main reason (these revisions were first published as part of the Index of Production for December 2016 released on 10 February 2017).

• UK GDP growth in Quarter 4 2016 saw a continuation of strong consumer spending which is in line with the Retail Sales Index for Quarter 4, which grew by 1.2% (published on 20 January 2017) and strong growth in the output of the services sector with a notable contribution in consumer-focused industries. In Quarter 4 2016, there has been a slowdown within business investment which fell by 1.0%, driven by subdued growth within the “ICT equipment and other machinery and equipment” assets.

• Growth in 2016 is 1.8% higher than that in 2015. This has been revised down by 0.2 percentage points from the preliminary estimate published on 26 January 2017. Further details are provided in the section titled “What is the 2016 picture?”

• GDP in current prices increased by 1.4% between Quarter 3 2016 and Quarter 4 2016.

• GDP per head in volume terms was estimated to have increased by 0.5% between Quarter 3 2016 and Quarter 4 2016.

Corrections to be aware of

We informed users on 25 November 2016 that, following a quality review, a processing error had been identified in the compilation of the estimates for the rail transport industry (49.1-2), which affects the period Quarter 1 (Jan to Mar) 1997 to Quarter 2 (Apr to June) 2016. In line with the National Accounts Revisions Policy, this error has been corrected in the Index of Services and Quarterly National Accounts published on 23 December 2016 for data from Quarter 1 2015. Data prior to 2015 will be corrected when next open for revision with Blue Book 2017 consistent releases due for publication on 29 September 2017.

Following a quality review it has been identified that the methodology used to estimate elements of purchased software within gross fixed capital formation (GFCF) has led to some double-counting from 1997 onwards. When this issue is resolved in Blue Book 2017 it will reduce the level of GFCF across the period by around 1.1% per year. The average impact on quarter-on-quarter GFCF growth is negative 0.02% and the average impact on quarter-on-quarter GDP growth is 0.00%.

Estimates within this release

In line with the National Accounts Revisions Policy, the earliest period open for revision in this release is Quarter 1 (Jan to Mar) 2016.

Construction output usually follows the National Accounts Revisions Policy. However, on this occasion, to allow further quality assurance of construction data, only Quarter 4 (Oct to Dec) 2016 is open for revision in this release.

All data in this bulletin are seasonally adjusted estimates, for further information regarding non-seasonally adjusted data, please refer to the UK Economic Accounts (UKEA), which can be downloaded directly from the UKEA dataset and on the UKEA main aggregates dataset table. Data published in the UKEA reflect data as published on 23 December 2016 and will be next updated on 31 March 2017 when the Quarter 4 (Oct to Dec) 2016 Quarterly National Accounts release and UKEA will become consistent.

All data within this bulletin have had the effect of price changes removed (in other words, the data are deflated), with the exception of income data which are only available in current prices.

The second estimate of GDP is produced around 7 and a half weeks after the end of the quarter to provide a timely estimate of GDP. At this stage the data content of this estimate from the output measure of GDP has risen to around 80% of the total required for the final output-based estimate. There is also around 50 to 60% data content available to produce estimates of GDP from the expenditure and income approaches.

Understanding gross domestic product

Gross domestic product (GDP) growth is the main indicator of economic performance. There are 3 approaches used to measure GDP: the output approach, the expenditure approach and the income approach.

Further information on all 3 approaches to measuring GDP can be found in the short guide to national accounts.

Reliability

Estimates for the most recent quarters are provisional and are subject to revision in the light of updated source information. We currently provide an analysis of past revisions in the GDP and other statistical bulletins that present time series.

Our revisions to economic statistics page brings together our work on revisions analysis, linking to articles and revisions policies.

Revisions to data provide one indication of the reliability of main indicators. Revisions triangles are published on our website for headline GDP, UK gross value added, the GDP deflator and the expenditure and income components of GDP.

Headline GDP components and GDP per head.

As seen in Figure 1, between Quarter 3 (July to Sept) 2016 and Quarter 4 (Oct to Dec) 2016 GDP grew by 0.7%, which is the 16th consecutive quarterly increase and continues the UK’s steady period of growth since Quarter 1 (Jan to Mar) 2013.

Output approach

The output approach of GDP has increased by 0.7% between Quarter 3 (July to Sept) 2016 and Quarter 4 (Oct to Dec) 2016, revised up by 0.1 percentage points from the preliminary estimate published on 26 January 2017.

All main output industrial groupings within GDP showed increases in Quarter 4 2016 compared with Quarter 3 2016. Within production, 3 of the 4 components increased, which resulted in overall positive growth in total production, while construction also showed a small increase of 0.2% between Quarter 3 2016 and Quarter 4 2016. All of the 4 components within the services industries showed an increase between Quarter 3 2016 and Quarter 4 2016.

The quarterly revision to production growth almost entirely drove the 0.1 percentage points increase to the output approach to GDP and within manufacturing this increase was broad- based across multiple industries. Within the production sub-industries, output from mining and quarrying (including oil and gas extraction) decreased by 7.0%; manufacturing (the largest component of production) increased by 1.2% and electricity, gas, steam and air conditioning supply industries increased by 3.1%. Water supply and sewerage increased by 2.0%.

The services industries increased by 0.8% in Quarter 4 2016, compared with the previous quarter, unrevised from the previous estimate, marking the 16th consecutive quarter of positive growth. The main drivers of the growth were wholesale trade except motor vehicles and motor cycles, retail trade except motor vehicles and motor cycles and travel agency activities. This follows a 1.0% increase in Quarter 3 2016.

Further detail on the services industries’ lower level components can be found in the Index of Services statistical bulletin published on 22 February 2017.

Expenditure approach

The expenditure approach of GDP increased by 0.7% between Quarter 3 (July to Sept) 2016 and Quarter 4 (Oct to Dec) 2016.

As has been the case in recent years, household final consumption expenditure (HHFCE) was a main driver and contributor to GDP growth in all quarters of 2016. Household spending grew by 0.7% in Quarter 4 2016, which was higher than the average quarter-on-quarter growth (0.6%) seen since Quarter 1 (Jan to Mar) 2013 when the economy started growing steadily. Much of the HHFCE estimate for Quarter 4 is forecast at this point, however, the continuing growth is in line with the Retail Sales Index for Quarter 4, which grew by 1.2% (published on 20 January 2017). A detailed breakdown of consumer spending will be available in the Quarterly National Accounts published on 31 March 2017.

In Quarter 4 2016, there has been a slowdown within business investment, which fell by 1.0%, driven by subdued growth within the “ICT equipment and other machinery and equipment” assets. Further details regarding the business investment data can be found within the Business investment release published on 22 February 2017.

Income approach

The income approach of GDP increased by 0.7% in chained volume measures (1.4% in current prices seasonally adjusted) between Quarter 3 (July to Sept) 2016 and Quarter 4 (Oct to Dec) 2016.

All data quoted in this section are in current prices seasonally adjusted.

Within the income measure of GDP, 3 out of 4 components showed growth between Quarter 3 2016 and Quarter 4 2016, with gross operating surplus of corporations, which is the profits of companies, showing the largest growth of 4.5%. The only component to show negative growth is other income which fell by 0.2%. Other income includes mixed income and the operating surplus of the non-corporate sector.

Compensation of employees, which includes wages and salaries and pensions, showed subdued growth of 0.1%. There was positive growth within the wages and salaries data, which has been partially offset by a fall within the Employer’s Social Contributions data which has showed some weakness in the latest quarter, however, the social contributions data are primarily forecast at this point.

GDP per head for Quarter 4 (Oct to Dec) 2016

In Quarter 4 (Oct to Dec) 2016, gross domestic product (GDP) per head increased by 0.5%, compared with Quarter 3 (July to Sept) 2016. GDP per head is now 1.8% above the pre-downturn peak in Quarter 1 (Jan to Mar) 2008, having surpassed it in Quarter 4 2015 (Figure 2).

Between 2015 and 2016, GDP per head increased by 1.1% compared with a growth of 1.4% between 2014 and 2015.

GDP per head is calculated by dividing GDP in chained volume measures by the latest population estimates and projections. The population estimates used in this release are those published on 23 June 2016 and the population projections used are those published on 29 October 2015.

The largest component within the output measure of gross domestic product (GDP) is the services industry with a weight of 78.8%.

Figure 3 shows the services industry has dominated the GDP growth in Quarter 4 (Oct to Dec) 2016 and has contributed 0.6 percentage points to the 0.7% quarterly growth. Within services, the largest contributor to growth was distribution, hotels and catering.

The largest component within the expenditure measure of GDP is household final consumption expenditure with a weight of approximately 60%.

Figure 4 shows the quarterly contribution of the expenditure components to the growth of GDP in chained volume measures. For Quarter 4 2016, the largest positive contribution to GDP came from net trade, which contributed a positive 1.3 percentage points. The negative contributions to GDP came from gross capital formation, which contributed a negative 1.1 percentage points. The contributions from net trade and gross capital formation are mainly offsetting as data for non-monetary gold (the main driver behind the movements in net trade and gross capital formation) feeds into both components but offset each other, in effect making non-monetary gold GDP neutral.

In the latest quarter, as in many recent periods, household final consumption expenditure has continued to make a positive contribution to GDP; 0.4 percentage points in Quarter 4 2016.

The largest component within the income measure of GDP is compensation of employees with a weight of approximately 50%.

Figure 5 shows the contribution made by income components to current price GDP. In Quarter 4 2016, the largest positive contribution to GDP came from gross operating surplus of corporations, which contributed 0.9 percentage points.

Growth in 2016 has increased by 1.8% compared with 2015. Growth in Quarter 1 (Jan to Mar) 2016 showed the slowest positive growth in 2016 of 0.2% but GDP growth then became steady and consistent throughout the rest of 2016 (see Table 1).

Figure 6 shows quarterly revisions between latest and previously published estimates of gross domestic product (GDP). Quarter 1 2016 is the first quarter open for revision in this release.

Growth in 2016 compared with 2015 is 1.8%, revised down 0.2 percentage points from the preliminary estimate published on 26 January 2017. The latest estimates present a more divergent picture between the different measurement approaches for GDP; expenditure, income, and output (Table L in the second estimate of GDP data tables details the annual growth rates for the 3 separate approaches).

In particular, the expenditure approach is weaker in 2016 compared with the income and output approaches, in part due to the changes in inventories and trade in goods components.

After a period of stock-building during 2014 and 2015 where levels of inventories were £16.6 billion and £12.4 billion respectively, there has been a slowdown during 2016 to a level of £2.4 billion. All data quoted are in chained volume measures seasonally adjusted.

Between 2015 and 2016, exports of goods fell and imports of goods increased causing a widening of the trade deficit. Exports of goods during 2016 have seen a slowdown compared with 2015 with a downward growth of negative 0.8%, however, 2015 saw a strong increase of 7.2% compared with 2014. The negative growth in 2016 was mainly driven by falls in exports of chemicals and fuels, however, there were increases within cars and aircraft but not enough to offset the decreases. Imports of goods have been increasing consistently year-on-year since 2010, with 2016 increasing by 3.7% compared with 2015. This follows an increase of 5.4% in 2015. The increase in 2016 is primarily due to an increase in imports of cars, aircraft and non-monetary gold. 

The estimates quoted in this international comparison section are the latest available estimates published by the respective bodies (referenced) at the time of preparation of this statistical bulletin and may subsequently have been revised. Quarter 4 (Oct to Dec) 2016 estimates for Canada and the Group of Seven (G7), were not available at the time of publication.

During Quarter 4 2016, the UK experienced the strongest rate of growth among European groupings and G7 countries. In Quarter 4 2016, the UK experienced 0.2 percentage points higher growth than the USA, who experienced a slowdown in growth from 0.9% in Quarter 3 (July to Sept) 2016 to 0.5% in Quarter 4 2016.

All of the areas included within our international comparisons saw positive growth in Quarter 4 2016 when compared with Quarter 3 2016. France and Germany experienced growth of 0.4%, whilst Italy and Japan experienced growth of 0.2% (Table 2). The European Union (EU28) grew by 0.5% (Figure 7), marking 15 consecutive quarters of positive growth and in the same period, the group of Euro Area countries (EA19) grew by 0.4%.

Italy is the only G7 country with its GDP still 7.4% below its pre-downturn peak (Quarter 1 2008). All other G7 countries are currently above pre-economic downturn peaks, in Quarter 4 2016 the USA shows signs of the strongest recovery at 12.9%. The UK has the second strongest rate at 8.6%, whilst Germany and France have rates of 7.8% and 4.5% respectively. Japan has experienced a slower recovery and at present is 3.3% above its pre-downturn peak.

Information on the estimates for the USA can be found on the Bureau of Economic Analysis website; information on the estimates for Japan can be found on the Japanese Cabinet Office website. More detailed information for the G7 and the EU countries can be found on the Organisation for Economic Co-operation and Development’s website and Eurostat website, respectively.

Non-UK countries and groupings may show revisions in the back series due to NSI revisions.

Figure 8 shows GDP for the USA, Germany, France, Italy, UK, Japan and Canada all indexed to Quarter 1 2008 (the pre-downturn peak in the UK) to allow comparison of each since that period.

Release policy

This release includes data available up to 15 February 2017. Data are consistent with that within the Index of Production statistical bulletin and the UK trade statistical bulletin (trade in goods data), which were both published on 10 February 2017.

Release content

Data included within this release are seasonally adjusted, however, non-seasonally adjusted data are available within the UK Economic Accounts (UKEA). This data can be downloaded directly from the UKEA dataset and on the UKEA main aggregates dataset table. Data published in the UKEA reflect data as published on 23 December 2016 and will be next updated on 31 March 2017 when the Quarter 4 (Oct to Dec) 2016 Quarterly National Accounts release and UKEA will become consistent.

Economic context

We publish a monthly economic commentary, which may be useful as it gives economic commentary on the latest GDP estimate and our other economic releases. The next article will be published on 22 February 2017.

VAT project

The VAT update October 2016 was published on 4 October 2016 and shared early VAT turnover analysis and data. The research article represents the first significant publication of new VAT turnover statistics as part of our commitment to develop a diverse range of administrative data sources for use in the national accounts. Please contact us with your views: vatdev@ons.gov.uk

Business investment

Business investment revisions triangles have been published on 22 February 2017 and are available within the datasets of the Business investment release.

Index of Services

The Index of Services publication has been published on 22 February 2017 and includes data for December 2016.

This is the first Second estimate of GDP bulletin released as part of the new economic theme days. As such this bulletin now follows a more streamlined format and some tables such as revisions, previously found in the background notes, can now be found in the main datasets.

Monthly economic commentary has been published alongside this release, presenting new analysis on the latest economic data.

We welcome your feedback on this new style bulletin via our short survey.

In the impact of methodological changes to chain-linking on gross domestic product article we informed users that in Blue Book 2017 the reference year and last base year will move forward 2 years to 2015 and, pending the outcome of further analysis, a follow-up communication note in February on the feasibility of implementing the final methodological change, further moving the last base year on when the data for the most recent year are formed. Analysis is still ongoing to explore a feasible option for deploying this final change in Blue Book 2017. Further information on plans for full implementation will be shared in spring 2017.

The national accounts are drawn together using data from many different sources. This ensures that the national accounts are comprehensive and provide different perspectives on the economy, for example, sales by retailers and purchases by households. Further details regarding the data sources used within GDP and the production and balancing processes can be found in the Quality and Methodology Information paper.

Important quality issues

There are common pitfalls in interpreting data series and these include:

• expectations of accuracy and reliability in early estimates are often too high
• revisions are an inevitable consequence of the trade-off between timeliness and accuracy
• early estimates are based on incomplete data

Very few statistical revisions arise as a result of “errors” in the popular sense of the word. All estimates, by definition, are subject to statistical “error”.

Many different approaches can be used to summarise revisions; the Validation and Quality Assurance section in the Quality and Methodology Information paper analyses the mean average revision and the mean absolute revision for GDP estimates over data publication iterations. In addition to this analysis, Section 11 of the revisions to gross domestic product in Blue Book 2016 article updates the metrics used to test revisions performance in order to answer the question “Is GDP biased?”.

Reaching the GDP balance

The different data content of the 3 approaches, the output approach, the expenditure approach and the income approach, dictates the approach taken in balancing quarterly data. In the UK, there are far more data available on output than in the other 2 approaches. However, in order to obtain the best estimate of GDP (the published figure), the estimates from all 3 approaches are balanced to produce an average.

Information on the methods we use for balancing the output, income and expenditure approaches to measuring GDP can be found on our website.

Alignment adjustments, found in Table M of the second estimate of GDP data tables in this release, have a target limit of plus or minus £2,000 million on any quarter. However, in periods where the data sources are particularly difficult to balance, slightly larger alignment adjustments are sometimes needed. To achieve this balance through alignment, balancing adjustments are applied to the expenditure and income components of GDP as required. They are applied to those individual components where data content is particularly weak in a given quarter due to a high level of forecast content.

The size and direction of the quarterly alignment adjustments in Quarter 4 (Oct to Dec) 2016 indicate that in this quarter, the levels of expenditure and income were lower than the level of output.

Table 3 shows the balancing adjustments applied to the GDP estimates in this publication.

Further information

We are committed to ensuring all information provided is kept strictly confidential and will only be used for statistical purposes. Further details regarding confidentiality can be found in the respondent charters for businesses and households, on our website.