Output in the Construction Industry: May 2015

• The May 2015 statistical bulletin provides users with the latest estimates of output in the construction industry. 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 May 2015, output in the construction industry was estimated to have decreased by 1.3% compared with April 2015. Both all new work, and repair and maintenance contributed to the fall

• All new work decreased by 1.5%, with all types of new work except infrastructure reporting decreases; total housing reported the largest fall of 5.8%, with smaller falls from private industrial, public other and private commercial of 3.3%, 1.4% and 0.3% respectively

• Repair and maintenance (R&M) decreased by 1.0%. Falls in non-housing R&M (-1.9%) and private housing R&M (-0.8%) were offset slightly by public housing R&M, which increased by 1.8%

• Compared with May 2014, output in the construction industry showed an increase of 1.3%. All new work increased by 3.2% while repair and maintenance decreased by 1.7%

• Comparing the 3 months, March 2015 to May 2015, with the previous 3 months, December 2014 to February 2015, construction output fell by 0.4%. All new work decreased by 1.7% and repair and maintenance increased by 1.8%

• When comparing the 3 months, March 2015 to May 2015 with the same 3 months a year ago, construction output was estimated to have increased by 2.7%. All new work increased by 4.2% and repair and maintenance by 0.3%

• The only period open for revision is April 2015 which has been revised upwards 0.3% from a fall of 0.8% to a fall of 0.5%. This was 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 the designation of Construction Price and Cost Indices due to concerns about the quality of these deflators. As a result the UK Statistics Authority announced its decision to suspend the designation of Output and New Orders as National Statistics in respect of the Code of Practice for Official Statistics.

The Office for National Statistics (ONS) took responsibility for the publication and development of the Construction Price and Cost Indices from the Department for Business Innovation & Skills (BIS) on 1 April 2015. Since this point, we have worked towards creating an interim solution to measure output prices and replace the statistical models that had been used in the production of chained volume measures (CVMs) for output in the construction industry since quarter 3 (July to Sept) 2014 and to provide an ongoing source of data from quarter 1 (Jan to Mar) 2015 onwards. We have also launched a consultation to gather feedback from users to help us improve this methodology and understand more about how the CPCIs are used.

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.

Chained volume measures are also described as volume. Construction output is used in the compilation of the output approach to measuring gross domestic product (GDP).

Detailed estimates along with a longer run of time series data are available to download in the Output in the Construction Industry, May 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 (39 Kb Word document) " article.

The data published in this release cover construction estimates for Great Britain. Construction output estimates for Northern Ireland can be obtained from the Central Survey Unit.

All work

In May 2015 all work:

• decreased by 1.3% compared with April 2015
• increased by 1.3% compared with May 2014
• in the 3 months (March 2015, April 2015, May 2015) compared with the previous 3 months (December 2014, January 2015, February 2015) construction output fell by 0.4%

Figure 1 shows the 2 main components of all work. The chart shows that the monthly path for construction output is a volatile one. After sustained growth since early 2013, there have been falls in both all new work, and repair and maintenance in recent periods. Both all new work, and repair and maintenance contributed to the fall in all work in May 2015.

Before we discuss each component, it is worth noting the change in the non-seasonally adjusted series.

Figure 2 shows the non-seasonally adjusted volume of all work in May 2015 did increase, but the increase of 0.6% in May 2015 compared with April 2014 was not as high as seen in previous April to May comparisons. As such, seasonal adjustment has resulted in this small increase in non-seasonally adjusted terms to become a contraction.

Figure 3 shows the components that make up all new work. The chart shows that there were falls in new housing and other new work in May 2015, while infrastructure has increased. While new housing has fallen this month the underlying pattern since early 2013 continued to show growth. Infrastructure has continued at a fairly constant level while other new work is showing a slight decline.

Figure 4 looks at the 2 components of repair and maintenance. In May 2015, non-housing repair and maintenance caused the fall in all repair and maintenance while there was no change in housing repair and maintenance. The underlying level of both non-housing and housing repair and maintenance is similar, however, non-housing is the more volatile component.

Summary of growth rates for all work types

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

• all work types except infrastructure and public new housing saw a decrease in the month-on-month growth rate; the main contribution to the fall was private new housing

• the month-on-month fall in all new work was due to a decrease in both total housing and other new work

• year-on-year there was a mixed picture with most work types reporting decreases, however, the larger weights in private new housing, infrastructure and private housing repair and maintenance resulted in a rise in all work

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 appear in this section.

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, April 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:

Index of Production (IoP) = between 0.3 and -0.3
Construction = between 0.7 and -0.7
Index of Services (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 monthly and revised quarterly output figures that fed into the Quarterly National Accounts release for quarter 1 (Jan to Mar) 2015 published on 30 June 2015.

The Quarterly National Accounts published on 30 June 2015 contained an estimate for quarterly construction of a fall of 0.2%. This estimate has not been revised within this release.

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 May 2015 was 70.8% of questionnaires, accounting for 79.0% 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 65 months, however, users should note that 60 months 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.

Users should note that the deflators used in the production of chained volume estimates of output in the construction industry have been created using a statistical model of the quarter 3, July to September 2014 tender price indices and (TPIs) and output price indices (OPIs). This is the second quarter where these deflators have been created using this statistical model and users should note that the confidence intervals surrounding these models are wide and caution should be taken when using the deflated estimates. More information on these statistical models can be found in the updated article Modelling Construction Statistics Deflators.

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.

Construction output fell by 1.3% in May 2015 following a fall of 0.5% in April 2015. As a result of these consecutive, negative monthly outturns, the annual growth rate has eased from a recent peak of 11.2% in December 2014 to 1.3% in May 2015. These data suggest that output in the construction industry as a whole has been broadly flat over the last 2 quarters, a marked slowdown compared with the industry’s performance during the broader economic recovery. Much of this easing is due to lower house building output growth, which has softened considerably in 2015.

On an annual basis, construction output grew by 1.3%, driven by the new work category. The strongest sub-component of new work was infrastructure, which increased by 16.2% in the year to May 2015. This was reflected in the Bank of England's Agents' Summary of Business Conditions for June, which reported steady growth in commercial construction and infrastructure output. Higher housing output also made a contribution to output growth over this period. New work for housing grew by 4.6% driven by private housing, whereas public housing contracted. The Agents also noted that house building growth has been more modest than a year ago, partly due to skill shortages. Repair and maintenance exerted downward pressure on growth.

Comparing May 2015 with the previous month, the fall in construction output was driven by both new work, and repair and maintenance. New work fell by -1.5%, largely as a consequence of house building which contracted by 5.8%, which may in turn reflect changing house price expectations. The ONS House Price Index (HPI) showed that UK house prices increased by 5.5% in April 2015, a fall from 9.6% in March 2015 and is indicative of a broader slowing of house price growth which may influence the incentives of developers. The easing of housing output growth was also noted in the Bank of England's Inflation Report for May 2015, which indicated that housing investment growth is expected to rise only modestly in 2015. The report highlighted that housing starts fell in quarter 2 (Apr to Jun) 2014 and that this was likely to feed through to lower investment in new dwellings in subsequent quarters.

All components of other new work excluding infrastructure also contracted on a monthly basis. Despite falling output for the sub-categories of other new work excluding infrastructure, HMRC's property transaction statistics show that non-residential property transactions were 6.4% higher in May 2015 compared with a year earlier, suggesting some pick-up in demand. In contrast, there was upward pressure on new work from infrastructure which increased by 5.7% on the month. Taken together, the easing of the growth rate of construction output is consistent with external indicators.

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) increased by 0.3% and fell by 0.3% in the EU28 in April 2015 compared with March 2015. The GB estimate for April 2015 showed that construction output decreased 0.5%. 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 increased by 0.8% in May 2015 compared with April 2015 and increased by 8.2% compared with May 2014.