Output in the Construction Industry: September and Quarter 3 (July to September) 2015

• In Quarter 3 (July to Sept) 2015, output in the construction industry was estimated to have decreased by 2.2% compared with Quarter 2 (Apr to June) 2015, unchanged from the estimate included in the preliminary estimate of gross domestic product (GDP) published on 27 October

• Between Quarter 3 (July to Sept) 2015 and Quarter 3 (July to Sept) 2014 output was estimated to have decreased by 0.1%

• Downward pressure on the quarter came from both all new work and repair and maintenance which fell by 2.2% and 2.1% respectively, with all work types except infrastructure and private industrial reporting decreases

• In the 3 months that make up Quarter 3 (July to Sept) 2015, the largest fall was seen in August (-3.4%)

• In September 2015, output in the construction industry was estimated to have decreased by 0.2% compared with August 2015 due to a fall in all new work of 2.4%. This was offset by repair and maintenance which increased by 3.8%

• On the year, output in the construction industry decreased by 1.6% in September 2015 compared with September 2014

• The release for September 2015 has a revision period back to July 2015. Output in the construction industry has been revised downwards by 0.2 percentage points in July 2015 and upwards by 0.9 percentage points in August 2015 to -1.2% and -3.4% respectively. These revisions were caused by the incorporation of late data. More information on revisions can be found in the background notes

Output is defined as the amount charged by construction companies to customers for the value of work (produced during the reporting period) excluding VAT and payments to sub-contractors.

Construction output estimates are a short-term indicator of construction output by private sector and public corporations within Great Britain. Output 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, September 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)” section in the background notes.

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.

National Statistics status

On 11 December 2014, the UK Statistics Authority announced its decision to suspend 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 Output and New Orders as National Statistics in respect of the Code of Practice for Official Statistics.

We took responsibility for the publication of the Construction Price and Cost Indices from the Department of Business Innovation and 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) 2014 onwards. This interim solution was included in the data published in June 2015 for all periods from January 2014 onwards.

A consultation (167.4 Kb Pdf) was held regarding this interim solution, the results of which can be found on our website along with information on the initial plans (435.2 Kb Pdf) for development of a longer-term solution for construction price statistics.

Figure 1 shows the 2 main components of all work. The chart shows that the fall in Quarter 3 (July to Sept) 2015 of 2.2% in all work compared with Quarter 2 (Apr to June) 2015 was caused by decreases in both all new work, and repair and maintenance, which fell by 2.2% and 2.1% respectively. All work fell by 0.1% in Quarter 3 (July to Sept) compared with the same period last year, this was the 1st quarterly year-on-year fall since Quarter 1 (Jan to Mar) 2013 when it decreased by 4.3%. This fall was due to all repair and maintenance which decreased by 5.1% in Quarter 3 (July to Sept) 2015 while all new work increased by 3.0% during the same period.

Figure 2 looks at the main components of all new work. After sustained growth in new housing since early 2013, Quarter 3 (July to Sept) 2015 showed a fall of 4.3%, the largest contraction since Quarter 2 (Apr to June) 2012, when it fell by 4.7%. Infrastructure increased in Quarter 3 (July to Sept) by 0.8%, the 5th consecutive quarter of growth, after being broadly flat since early 2012. Other new work continued to fall into Quarter 3 (July to Sept) 2015 and was at its lowest level since Quarter 1 (Jan to Mar) 2014.

Figure 3 shows the main components of repair and maintenance. In Quarter 3 (July to Sept) 2015, all repair and maintenance fell by 2.1% compared with Quarter 2 (Apr to June) 2015. Both housing and non-housing repair and maintenance fell on the quarter, decreasing by 1.9% and 2.3% respectively. On the year repair and maintenance fell by 5.1%, non-housing repair and maintenance was the main contributor falling by 9.1%. This was the largest year-on-year fall in this work type since Quarter 3 (July to Sept) 2010 when it fell by 19.1%.

Figure 4 shows the contribution of each sector to output growth in the construction industry between Quarter 3 (July to Sept) and Quarter 2 (Apr to June).

All work

In September 2015 all work:

• decreased by 0.2% compared with August 2015

• decreased by 1.6% compared with September 2014

Figure 5 shows the 2 main components of all work. The chart shows that the monthly path for construction output is volatile and can be split into distinct periods. The early periods show a rise in output which remained at a fairly constant level until late 2011 when output started to fall. Output then increased steadily until early 2015 when we saw a contraction in more recent periods, with falls of 1.2% and 3.4% in July and August 2015 which is possibly related to holiday periods, while September saw a smaller contraction of 0.2%.

Figure 6 looks at the main components of all new work. There was sustained growth in new housing from early 2013 to mid 2014, however, in more recent periods growth has flattened and the housing market is stagnating. After sustained growth in infrastructure from late 2014, there were falls in this work type in August and September 2015. Other new work remained fairly flat from 2012 but also reported decreases in September 2015.

Figure 7 looks at the 2 main components of repair and maintenance. The level of housing and non-housing repair and maintenance is fairly similar throughout the time series, with both series fairly volatile. After falls in housing and non-housing repair and maintenance in August 2015, there has been a return to growth in September 2015 with housing and non-housing repair and maintenance increasing by 4.8% and 2.7% respectively.

Summary of growth rates for all work types

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

• all work decreased in September 2015 compared with August 2015 due a fall in all new work

• all components of repair and maintenance showed an increase in September 2015 compared with August 2015

• repair and maintenance was the main contributor to the year-on-year decrease in all work with falls in public corporations and non-housing repair and maintenance

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 September 2015 was 75.5% of questionnaires, accounting for 72.0% 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 67 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.

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. This table should help to 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 2012. Construction has a weight of 59, which means that it is 59 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) 2015 data:

Construction growth = 1.4
Weight in GDP = 0.059 (59/1000)
Effect on GDP = 1.4 * 0.059 = 0.08 or 0.1 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 0.9 and -0.9
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 = 0.148*0.4 = 0.0592 or 0.1 to 1 dp
Construction = 0.059*0.9 = 0.0531 or 0.1 to 1 dp
IoS = 0.786*0.1 = 0.0786 or 0.1 to 1 dp

Table 3 shows the latest monthly and revised quarterly output figures that fed into the GDP preliminary release for Quarter 3 (July to Sept) 2015 published on the 27 October 2015.

The preliminary estimate of GDP published on 27 October 2015 contained an estimate for quarterly construction of a fall of 2.2%, contributing -0.1 percentage points to GDP. This estimate has not been revised within this release.

On the month, construction output decreased by 0.2% in September 2015, the third successive negative monthly fall. As a result, the level of output in September 2015 was 1.6% lower than the corresponding period a year earlier. Construction output also fell over Quarter 3 (July to Sept) 2015 as a whole (-2.2%) putting downward pressure on the quarterly rate of GDP growth. In comparison to the slowdown in construction activity, GDP grew by 2.3% in Quarter 3 (July to Sept) 2015 on the same quarter a year earlier.

On a monthly basis, the weakening in construction output was due to a fall in new work, partially offset by a rise in repair and maintenance. New work decreased by 2.4% (the third successive month of negative output growth). The fall in new work was depressed by infrastructure and private commercial which fell by 6.2% and 4.6% respectively. The Bank of England's Agents' Summary of Business Conditions for November reported that there was some easing in the pace of infrastructure activity.

However, housing construction output returned to growth in September, which coincided with evidence of an improvement in the housing market. The Agents noted that housing market activity increased modestly, supported by strong competition among mortgage lenders, while the ONS House Price Index (HPI) recorded house price inflation of 5.2% in the year to August 2015. The Bank of England's Inflation Report for November 2015 also noted that Halifax and Nationwide house price indices showed a robust annual growth rate of around 6.0%, although this was down from around 10.0% growth seen during the summer of 2014. Repair and maintenance activity was supported by all sub-categories, housing and non-housing.

The contraction in construction output on an annual basis was driven by repair and maintenance, which fell by 4.8%. This was primarily driven by the non-housing component which decreased by 10.1%. In contrast, new work grew by 0.3% and offset part of the decline in repair and maintenance. Within new work, infrastructure work remained 23.5% above levels seen in September 2014, despite the recent monthly declines.

External indicators suggest that growth in construction remains strong, particularly in housing. The Inflation Report noted that housing demand remains robust, reflected in net mortgage lending data which grew by 5.5% in September, but still remains below pre-crisis levels.

The recovery in the housing market in recent years has previously been cited as one of the factors affecting the construction of housing. When compared with the economy's pre-downturn peak (in Quarter 1 (Jan to Mar) 2008) the construction of new housing in Quarter 3 (July to Sept) 2015 increased by 12.0%.

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 (EA19) decreased by 0.2% and by 1.2% in the EU28 in August 2015 compared with July 2015. The Great Britain (GB) estimate for August 2015 showed that construction output decreased by 3.4%. In August 2015 compared with August 2014, production in construction fell by 6.0% in the EA19 and by 5.0% in the EU28 while the GB estimate showed that construction output fell by 0.6%. 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 2012 = 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 0.6% in September 2015 compared with August 2015 and increased by 14.1% compared with September 2014.

International comparisons

International construction comparisons are compiled by Eurostat. The estimates produced in this bulletin are included in these comparisons. Further information can be found on the Eurostat web page.