Output in the Construction Industry: March 2015 and Quarter 1 (Jan to Mar) 2015

• This statistical bulletin provides users with the latest estimates of output in the construction industry for March and quarter 1 (Jan to Mar) 2015. Output is defined as the amount charged by construction companies to customers for value of work (produced during the reporting period) excluding VAT and payments to sub-contractors

• In quarter 1 (Jan to Mar) 2015, output in the construction industry was estimated to have decreased by 1.1% compared with quarter 4 (Oct to Dec) 2014. Between quarter 1 (Jan to Mar) 2015 and quarter 1 (Jan to Mar) 2014, output was estimated to have decreased by 0.3%. This is the first year-on-year fall since quarter 2 (Apr to June) 2013

• Downward pressure on the quarter came from all new work, which fell by 1.7%, the largest quarter-on-quarter fall since quarter 1 (Jan to Mar) 2013, when it fell by 2.0%. Looking closely at the 3 months that make up quarter 1, January, February and March 2015, most of this fall can be attributed to the large fall in January. Total housing, public other new work and private commercial work reported falls of 3.4%, 6.6% and 3.0% respectively on the quarter

• All repair and maintenance decreased by 0.2% in quarter 1 (Jan to Mar) compared with quarter 4 (Oct to Dec). All work types except public housing repair and maintenance reported falls

• Following falls in January and February 2015, output in the construction industry was estimated to have increased by 3.9% in March 2015 compared with February 2015. On the year, output in the construction industry increased by 1.6% in March 2015 compared with March 2014

• The preliminary estimate of gross domestic product (GDP) published on 28 April 2015 contained a forecast for construction output of a fall of 1.6%. This estimate has been revised within this release based upon updated survey responses and output is now estimated to have decreased by 1.1%. This upward revision to construction output of 0.5% will have no impact on GDP to 1 decimal place

• The release for March 2015 has a revision period back to January 2015. Output in the construction industry has been revised upwards by 0.6 percentage points in both January and February 2015 to -1.9% and -0.3% respectively; these revisions were caused by the incorporation of late data. More information on revisions can be found in the background notes

On 11 December 2014, the UK Statistics Authority announced its decision to suspend designation of Construction Price and Cost Indices including output and new orders as National Statistics in respect of the Code of Practice for Official Statistics. Taken as a whole, the Code aims to ensure that official statistics meet the needs of users, are produced, managed, and disseminated to a high standard and that statistics are well-explained. The Authority has concluded that, despite the steps taken by ONS, this overall objective of the Code has not been met. The quality of the data in this release has not been affected.

Construction output estimates are a short-term indicator of construction output by the private sector and public corporations within Great Britain and are produced from a monthly survey of 8,000 businesses in Great Britain. The estimates are produced and published at current prices (including inflationary price effects) and at chained volume estimates (with inflationary effects removed) both seasonally adjusted and non-seasonally adjusted.

Detailed estimates along with a longer run of time series data are available to download in the Output in the Construction Industry, March and quarter 1 (Jan to Mar) 2015 reference tables. In these tables, users will find chained volume estimates back to quarter 1 (Jan to Mar) 1997 and monthly estimates back to January 2010. Current price non-seasonally adjusted data are available back to quarter 1 (Jan to Mar) 1955. More information on these statistics can be found in the “definitions and explanations” section in the background notes.

The quality of the estimate of output in the construction industry

Output in the construction industry estimates are produced from the monthly business survey on the second Friday of the month, 2 months after the reporting month. Revised results, for previously published periods, are published in line with the national accounts revisions policy. More information about the data content for this release can be found in the background notes. Revisions are an inevitable consequence of the trade-off between timeliness and accuracy. The response rate in March 2015 was 70.4% of questionnaires, accounting for 79.8% of registered turnover in the construction industry. Therefore the estimate is subject to revisions as more data become available.

The monthly output in the construction industry time series now spans 63 months, however, users should note that this is the minimum time span recommended by Eurostat for seasonal adjustment. While the seasonal pattern is generally established after 60 months in a monthly time series, there is still potential for increased revisions until the seasonal pattern has matured.

All estimates, by definition, are subject to statistical uncertainty and for many well-established statistics, we measure and publish the sampling error associated with the estimate, using this as an indicator of accuracy. For construction output we publish sample and non-sample errors in table 11 of the main reference tables. It should be noted that we are continually working on methodological changes to improve the accuracy of the construction output estimates, progress on these can be found on the ONS continuous improvement page on our website.

An article describing the interim solution for construction price indices (OPIs) that we propose to replace the current statistical models currently being used in the production of chained volume measures (CVMs) for Output in the Construction Industry for quarters 3 (July to Sept) and 4 (Oct to Dec) of 2014 and to provide an ongoing source of data from quarter 1 (Jan to Mar) of 2015 onwards, was published on our website on 8 May 2015.

Construction output grew by 3.9% in March 2015, a marked increase from the -0.3% contraction in February 2015. The strength of construction output in March raises the quarterly outturn for quarter 1 (Jan to Mar) 2015 to a contraction of 1.1%, revised up from a 1.6% contraction published in the preliminary estimate of GDP. The preliminary estimate showed that construction output provided a contribution to GDP growth of -0.1% in both quarter 1 (Jan to Mar) 2015 and in quarter 4 (Oct to Dec) 2014. However, the Agents' Summary of Business Conditions for April noted that construction output growth had remained robust, although the pace of increase from a year earlier had eased a little further.

On a monthly basis, the increase in construction output was driven by the repair and maintenance component which grew by 12.2% whereas new work fell modestly. Growth in repair and maintenance was driven by the non-housing components which grew by 20.1% while the housing components increased by 4.1%. However, some components of new work also grew on the month. New work for private housing grew by 2.3% in March, after 5 successive months of contraction. The Bank of England's Inflation Report for May 2015 reflected a similar picture and showed that private housing investment fell by -1.1% in quarter 4 (Oct to Dec) 2014.

On an annual basis, construction output increased by 1.6% in March 2015. Similar to the monthly picture, growth was driven by repair and maintenance, while new work increased only slightly. Within repair and maintenance growth was driven by the non-housing component while the output of the housing component fell. The increase in new work was driven by private housing which grew by 11.1%: a slowdown in growth from 2014.

Much of this recent moderation of growth of the housing market output may be a consequence of a slowdown in house price growth and mortgage market activity. The ONS House Price Index (HPI) showed that UK house prices increased by 7.2% in the year to February 2015: easing from its recent peak of 12.1% in September 2014. House price inflation may have supported housing output in 2014 and the tapering of house price inflation may have applied downward pressure on new work for housing output. The Agents’ Summary of Business Conditions for April 2015 also identified skill shortages and larger house-builders focusing on improving margins as reasons for a moderation in growth.

Several recent indicators also point to a moderation in housing market demand. The Credit Conditions' Survey for quarter 1 (Jan to Mar) 2015 noted that demand for secured credit had fallen markedly in the past 3 quarters. Lenders noted 2 reasons for this reduction in demand: some pointed to concerns about housing affordability arising from higher house price to earnings ratios, while others noted that uncertainty about the outlook for the housing market may have reduced demand.

The Inflation Report also noted that credit supply factors have also affected mortgage market activity but to a lesser extent than credit demand. The recent mortgage market review (MMR), which introduced stringent affordability criteria is 1 possible reason for a fall in the number of mortgage approvals and may have dissuaded some people from applying for a mortgage.

However, the report noted that housing market activity has remained more robust than mortgage market activity. The Agents’ also noted that while housing market transactions remained lower than a year earlier, they had picked up in the year to date. Mortgage approvals were 13.5% lower in quarter 1 (Jan to Mar) 2015 than in the same period a year earlier, suggesting relatively subdued housing market transactions, which may also have tempered the output of the housing construction industry.

Figure 1 shows the 2 main components of all work. The chart shows that the fall in quarter 1 (Jan to Mar) 2015 of 1.1% in all work compared with quarter 4 (Oct to Dec) 2014 has been caused by decreases in both all new work, and repair and maintenance, which fell by 1.7% and 0.2% respectively.

Figure 2 looks at the main components of all new work. After sustained growth in new housing since early 2013, quarter 1 (Jan to Mar) 2015 showed a contraction for the second consecutive quarter, falling by 3.4%. However, the level of total housing at £6.6 billion still remained 5.0% higher than quarter 1 (Jan to Mar) 2014. Infrastructure increased in quarter 1 (Jan to Mar) 2015 but has remained broadly flat since early 2012. Other new work continued to fall into quarter 1 (Jan to Mar) 2015 and was at its lowest level since quarter 4 (Oct to Dec) 1997.

Figure 3 shows the main components of repair and maintenance. In quarter 1 (Jan to Mar) 2015, all repair and maintenance fell slightly, by 0.2% compared with quarter 4 (Oct to Dec) 2014. Both housing, and non-housing repair and maintenance fell on the quarter, decreasing by 0.2% and 0.1% respectively.

All work

In March 2015 all work:

• increased by 3.9% compared with February 2015

• increased by 1.6% compared with March 2014

Figure 4 shows the 2 main components of all work. The chart shows that after a slight decline in output in late 2014 and early 2015, there has been growth of 3.9% in all work in March 2015 compared with February 2015. The increase was caused by a rise of 12.2% in repair and maintenance, offset slightly by a fall of 1.0% in all new work.

Figure 5 looks at the 2 main components of repair and maintenance; while housing repair and maintenance has remained fairly static, it is clear that the increase into March 2015 was due to non-housing repair and maintenance. This series is far more volatile than housing repair and maintenance and may still have an element of seasonality, despite being a seasonally adjusted series. When the interim solution for new deflators is introduced in our next release, we will be reviewing the seasonal adjustment of all types of work and will therefore look to address this possible residual seasonality.

Summary of growth rates for all work types

Table 2 provides a summary of growth rates across the different types of construction work in March 2015. Some main points from this table are as follows:

• all work increased due to a record rise in all repair and maintenance on the month

• all components of repair and maintenance showed an increase in March 2015 compared with February 2015

• all new work, and repair and maintenance contributed to the year-on-year increase in all work, with all work types except public new housing, public other new work, private commercial, and private housing repair and maintenance showing growth

International perspective

Output in the construction industry follows the Eurostat short term statistics (STS) regulation for production in construction. Before any comparisons are made with the Euro area or EU28, it is worth noting that the UK is the only member state to follow the A method for compiling production in construction statistics.

The latest release of production in construction showed that construction output in the euro area (EA19) decreased by 1.8% and by 1.2% in the EU28 in February 2015 compared with January 2015. The GB estimate for February 2015 showed that construction output decreased by 0.3%. In February 2015 compared with February 2014, production in construction fell by 3.7% in the EA19 and by 2.4% in the EU28 while the GB estimate showed that construction output fell by 0.2%. It should be noted that an accurate comparison cannot be made as Eurostat data are calculated on a 2010 = 100 basis, while GB data are calculated on a 2011 = 100 basis.

Outside of the EU, the US Census Bureau release Value of construction put in place showed provisional estimates of construction output decreased by 0.6% in March 2015 compared with February 2015 and increased by 2.0% compared with March 2014.

Construction estimates are a main component of the output approach to measuring GDP along with the estimates of services, production and agriculture. As an aid to users, the short-term economic indicator releases that directly feed into GDP include an additional table of the GDP components. It is anticipated that this table will inform users of the relationship between the individual components which comprise GDP output. The publication dates and the quarterly growths of the individual GDP components are shown below.

Each component of GDP has a weight within GDP, based on its value in 2011. Construction has a weight of 64, which means that it is 64 parts of the 1,000 that make up total GDP.

To determine the effect each component has on GDP, multiply the component growth by its weight in GDP.

An example using quarter 2 (Apr to June) 2014 data:

Construction growth = 0.7
Weight in GDP = 0.064 (64/1000)
Effect on GDP = 0.7 * 0.064 = 0.0448 or 0.0 to 1 decimal place (dp)

Revisions to components and the effect on GDP can be calculated using the same process. As a general rule there are no revisions to GDP when the component revisions are:

IoP = between 0.3 and -0.3
Construction = between 0.7 and -0.7
IoS = 0.0 (all values above or below 0.0 effect GDP due to the high weight of IoS in GDP).

Because;

IoP = 0.146*0.4 = 0.0584 or 0.1 to 1 dp

Construction = 0.064*0.8 = 0.0512 or 0.1 to 1 dp
IoS = 0.784*0.1 = 0.0784 or 0.1 to 1 dp

Table 3 shows the latest and revised quarterly output figures that fed into the GDP preliminary release for Q1 2015 published on the 28 April 2015.

The preliminary estimate of GDP published on 28 April 2015 contained an estimate for quarterly construction of a fall of 1.6%. This estimate has been revised within this release based upon updated survey responses and is now estimated to have decreased by 1.1%.