Index of Production, UK: December 2015

Total production output is estimated to have decreased by 0.5% between Quarter 3 (July to Sep) 2015 and Quarter 4 (Oct to Dec) 2015. This decrease was larger than the forecasted decrease of 0.2% contained within the Gross Domestic Product: Preliminary Estimate, Quarter 4 (Oct to Dec) 2015.

The largest contribution to the total production quarterly decrease came from mining & quarrying, which decreased by 2.3%, while manufacturing output remained unchanged during the same period.

Total production output is estimated to have increased by 1.0% between 2014 and 2015. Of the 4 main sectors, manufacturing output was the only one to fall, decreasing by 0.2%.

Total production output is estimated to have decreased by 0.4% in December 2015 compared with December 2014. The largest contribution to the fall came from manufacturing, which decreased by 1.7%.

Total production output is estimated to have decreased by 1.1% between November 2015 and December 2015. There were decreases in 3 of the 4 main sectors, with mining & quarrying having the largest contribution, decreasing by 4.0%.

Manufacturing output decreased by 0.2% in December 2015 compared with November 2015. The largest contribution to the decrease came from the manufacture of wood, paper products & printing, which decreased by 2.1%.

In Quarter 4 (Oct to Dec) 2015, production and manufacturing were 9.8% and 6.5% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

This bulletin presents the monthly estimates of the Index of Production (IoP) for the UK production industries, December 2015. The IoP is one of the earliest indicators of growth and it measures output in the manufacturing (the largest component of production), mining & quarrying, energy supply and water supply & waste management industries. The production industries account for 14.9% of the output approach to the measurement of gross domestic product.

IoP values are referenced to 2012 so that the average for 2012 is equal to 100. Therefore, currently an index value of 110 would indicate that output is 10% higher than the average for 2012. The index estimates are mainly based on a monthly business survey (MBS) of approximately 6,000 businesses, covering all the territory of the UK without geographical breakdown. The total IoP estimate and various breakdowns are widely used in private and public sector institutions. Care should be taken when using the month-on-month growth rates due to their volatility. All figures contained within this release are chained volume seasonally adjusted estimates, unless otherwise stated.

This release presents:

• the most recent IoP figures

• the economic context to the IoP

• GDP impact and components

• a supplementary analysis to the IoP

• spotlight

• background notes section including an assessment of the quality of the IoP, as well as an explanation of the terms used in this bulletin

Table 1 shows the main figures for this release. Figure 1 shows the production and manufacturing series from September 2013 to December 2015.

We have developed guidelines for measuring statistical quality; these are based upon the 5 European Statistical System (ESS) quality dimensions. The IoP in its current form adheres to these requirements. One important dimension for measuring statistical quality is accuracy. That is, the extent to which the estimate measures the underlying "true" value of the output growth (of the production industries) in the UK for a particular period. Although the IoP meets its legal requirements for statistical accuracy, still as in all survey-based estimates, by definition, its estimates are subject to statistical uncertainty or errors. These errors consist of 2 main elements; the sampling error and the non-sampling error.

For many well-established statistics we measure and publish the sampling error associated with the estimate, using this as an indicator of accuracy. The IoP however, is constructed from a variety of data sources, some of which are not based on random samples. As a result, we currently do not publish a measure of the sampling error associated with the IoP underlying data, mainly the monthly business survey (MBS). However, research is currently under way to attempt to measure the standard error and the results of this will be published on completion.

Non-sampling errors are not easy to quantify but can be caused by coverage issues, measurement, processing and non-response. The response rate gives an indication of the likely impact of non-response error on the survey estimates. From January 2015, the MBS response rates for data included in the IoP publication have been published in the background notes ‘methods’ section of the statistical bulletin. This is to give further information of the percentages of the amount of turnover and questionnaire forms returned. We publish MBS historical response rates back to 2010 (34.5 Kb Excel sheet).

A further dimension of measuring accuracy is reliability, which can be measured using evidence from analyses of revisions to assess the closeness of early estimates to subsequent estimated values. Revisions are an inevitable consequence of the trade-off between timeliness and accuracy.

Figures for the most recent months are provisional and subject to revision in light of:

• late responses to surveys and administrative sources

• forecasts being replaced by actual data

• revisions to seasonal adjustment factors, which are re-estimated every month and reviewed annually

Revisions to the IoP are typically small (around 0.1 to 0.2 percentage points), with the frequency of upward and downward revisions broadly equal.

Further information on the most recent revisions analysis can be found in the revisions to IoP section and in the revision triangles section in the bulletin background note.

It should be noted that care should be taken when using the month-on-month growth rates, due to their volatility. Further information on the latest quality and methodology information (QMI) for the IoP can be found in the QMI paper (247.9 Kb Pdf). Furthermore, the IoP is constantly being reviewed and improved for accuracy and uncertainty as part of the GDP(O) improvement project; further details of improvements are published each year as part of a suite of Blue Book articles. A full list of the GDP(O) improvement project articles can be found on the Improvements page of our website.

Production output declined for a second consecutive month in December 2015, at a faster rate than in November 2015. Following positive quarterly growth in the first 3 quarters of 2015 the contraction in the last 2 months of the year led to a contraction in production output in Quarter 4 (Oct to Dec) 2015.

Throughout 2015, manufacturing experienced alternating periods of expansion and contraction which have resulted in current manufacturing levels being lower than those experienced at the beginning of the year (for more information and analysis of the latest figures see the production and sectors supplementary analysis section of the bulletin).

From Quarter 1 (Jan to Mar) 1997 to Quarter 4 (Oct to Dec) 2015, production and its main components followed different paths (Figure 2). Over this period, the electricity, gas, steam & air conditioning & water supply, sewerage and waste management sectors grew at compound average growth rates of 0.2% and 0.5% per quarter while production as a whole contracted at a compound average growth rate of 0.1% per quarter. Over the same period manufacturing was relatively flat at 0.0%, while mining & quarrying contracted faster than production at a negative compound average growth rate of 1.0% per quarter. A compound average growth is the rate at which a series would have increased or decreased if it had grown or fallen at a steady rate over a number of periods.

During the UK economy’s downturn (Quarter 1 (Jan to Mar) 2008 and Quarter 2 (Apr to June) 2009), production and all of its components contracted. However, the path of mining & quarrying was broadly unaffected by the economy’s downturn with its output contracting only slightly faster than prior to the downturn (Figure 2). From the economy’s peak in Quarter 1 (Jan to Mar) 2008 to the economy’s trough in Quarter 2 (Apr to June) 2009, manufacturing experienced the largest contraction (12.3%) followed by total production (10.6%), water supply, sewerage & waste management (8.8%), mining & quarrying (7.3%) and electricity, gas, steam & air conditioning (3.5%).

Following the economy’s downturn (from Quarter 3 (July to Sep) 2009 to Quarter 4 (Oct to Dec) 2015), total production remained broadly stable while manufacturing and water supply, sewerage & waste management returned to growth at compound average growth rates of 0.2% and 0.6% respectively. However, over the same period mining & quarrying and electricity, gas, steam & air conditioning continued to contract at compound average growth rates of 1.1% and 0.4%, per quarter.

In Quarter 4 (Oct to Dec) 2015 production and manufacturing remained below their Quarter 1 (Jan to Mar) 2008 levels by 9.8% and 6.5%, respectively. Moreover, in Quarter 4 (Oct to Dec) 2015 mining & quarrying and electricity, gas, steam & air conditioning output, which continued to decline following the downturn, were 31.2% and 12.2% below their respective values in Quarter 1 (Jan to Mar) 2008. Water supply, sewerage & waste management remains the only main-sector within production to have surpassed its value in Quarter 1 (Jan to Mar) 2008, by 7.5%, as of Quarter 4 (Oct to Dec) 2015.

Headline GDP surpassed its pre-downturn peak in Quarter 2 (Apr to June) 2013 and services remains the only headline industry grouping to have achieved this. This is consistent with the historical trend of services growing at a faster rate than production and manufacturing, despite the fact that productivity in the production industries (manufacturing in particular) has on average grown at a faster rate than in the service industries since 1997 (more information can be found in Labour Productivity, Quarter 3 (July to Sep) 2015). The slower output growth and increased productivity, therefore, reflect the falling share of the labour force employed in manufacturing, which fell from 16.5% to 9.8% between 1997 and 2014 (Labour Market Statistics, January 2016, reference table EMP13).

Over the past year the manufacturing industry has experienced deflation, in terms of the prices manufacturers pay for materials and fuels used in the production process (input prices) and the prices they charge for the goods they produce (output prices). Input prices paid by UK manufacturers fell by 10.8% in the year to December 2015, from a fall of 13.1% in the year to November 2015. Output prices have also experienced deflation, falling by 1.2% in the year to December 2015. With crude oil impacting input prices, this feeds through to petroleum products, contributing to the decrease in their output prices (more information can be found in Producer Price Index, December 2015).

Figure 3 shows the share of nominal gross value added (GVA) accounted for by production in the UK and a selection of other major economies (more information on data for France, Germany, Italy, Japan and the USA can be found on the Organisation for Economic Co-operation and Development (OECD) website). In 1997, the share of nominal GVA accounted for by production in the UK was 23.3%, around the middle of the range relative to the other economies. By 2013, the UK had become relatively less reliant on production, as its share fell to 15.4% of nominal GVA.

The same trend was observed in manufacturing, where the share of nominal GVA fell from 18.4% in 1997 to 10.8% in 2013. Moreover, from 1997 to 2013 the composition of production in the UK changed slightly, with the share of production attributed to manufacturing decreasing from 78.8% in 1997 to 69.8% in 2013.

In this release, the earliest period open for revision was January 2015, in line with the National Accounts revisions policy (41.6 Kb Pdf).

The preliminary estimate of GDP, published on 28 January 2015, contained a forecasted decrease of 0.2% for production in Quarter 4 (Oct to Dec) 2015. This release of data estimates that production decreased by 0.5% between Quarter 3 (July to Sep) 2015 and Quarter 4 (Oct to Dec) 2015. The decrease in IoP was larger than forecasted primarily due to revisions in 2 sectors due to the receipt of revised data to replace early estimates submitted by the Department of Energy and Climate Change (DECC). Firstly, the fall in mining & quarrying was revised down from a decrease of 1.4% to a decrease of 2.3% due to a revision to the extraction of crude petroleum & natural gas sub-sector. Secondly, the forecasted decrease of 0.2% in the electricity, gas, steam & air conditioning sector was revised down to a decrease of 2.4%. Due to the weight of the production industries within the economy, the impact on the recently published GDP preliminary estimate is less than 0.1 percentage points.

The estimates for the production industries are generally the first of the main components for the output approach to the measurement of GDP to be published (agriculture, construction and services are the other components). A forecast for all the components are available for Quarter 4 (Oct to Dec) 2015. Details of the data already published can be found in Table 2. The Retail Sales Index reported in Table 2 is not a direct component of the output approach to measuring GDP. It does, however, feed into estimates of GDP in 2 ways. Firstly, it feeds into the services industries when GDP is measured from the output approach. Secondly, it is a data source used to measure household final consumption expenditure which feeds into GDP estimates when measured from the expenditure approach.

Output in the construction industry for December 2015 will be published on 12 February 2016 and services output for the same period on 25 February 2016.

Total production

Total production output decreased by 0.5% in Quarter 4 (Oct to Dec) 2015 compared with Quarter 3 (July to Sep) 2015 (Table 3). This decrease was larger than the forecasted decrease of 0.2% contained within the recently published Gross Domestic Product: Preliminary Estimate, Quarter 4 (Oct to Dec) 2015. This was due to downward revisions to the mining & quarrying and electricity, gas, steam & air conditioning sectors, caused by the receipt of new revised data to replace early estimates submitted by the Department of Energy and Climate Change (DECC).

The quarterly decrease in total production reflected decreases of 2.3% in mining & quarrying output; 2.4% in electricity, gas, steam & air conditioning output and 0.4% in water supply, sewerage & waste management. Manufacturing growth was flat at 0.0% (Table 3).

In 2015, total production output increased by 1.0% compared with 2014. There were increases in 3 of the 4 main sectors, with the largest contribution to the increase coming from mining & quarrying, which increased by 6.6% and contributed 0.9 percentage points to total production. This was followed by increases in water supply, sewerage & waste management, which increased by 3.1%; and in electricity, gas, steam & air conditioning output, which increased by 0.3%. The only main sector to decrease was manufacturing, which decreased by 0.2% compared with 2014 and contributed 0.1 percentage points to total production. Further details about the manufacturing growth in 2015 can be found in the industry spotlight section.

Total production output decreased by 0.4% in December 2015 compared with December 2014 (Table 3). There were decreases in 2 of its 4 main sectors. The largest contribution came from manufacturing, which decreased by 1.7% and contributed 1.2 percentage points to total production. Output in the electricity, gas, steam & air conditioning sector decreased by 6.6% and contributed 0.6 percentage points to total production. These decreases were largely offset by increases in mining & quarrying, which increased by 7.4% and contributed 0.9 percentage points to total production and in water supply, sewerage & waste management, which increased by 5.7% and contributed 0.5 percentage points to total production (Figure 5).

Between November 2015 and December 2015, total production decreased by 1.1% following a fall of 0.8% in the previous month (Table 3). This decrease in total production is larger than the forecasted fall of 0.2% contained within the GDP preliminary estimate due to downward revisions to both mining & quarrying and electricity, gas, steam & air conditioning sectors.

There were decreases in 3 of the 4 main sectors, with the largest contributions coming from mining & quarrying output, which decreased by 4.0% and contributed 0.6 percentage points and electricity, gas, steam & air conditioning output, which decreased by 5.4% and contributed 0.5 percentage points to total production. This was followed by a decrease of 0.2% in manufacturing, which contributed 0.2 percentage points to total production. The only main sector to increase was water supply, sewerage & waste management, which increased by 0.6% and contributed 0.1 percentage points to total production (Figure 6).

Manufacturing

Manufacturing growth remained unchanged at 0.0% in Quarter 4 (Oct to Dec) 2015 compared with Quarter 3 (July to Sep) 2015. This estimate was unchanged from the forecast contained within the recent preliminary estimate of GDP. Output increased in 6 of the 13 manufacturing subsectors. The manufacturing subsector with the largest upward contribution to total production output was the manufacture of transport equipment, which increased by 1.7% and contributed 0.2 percentage points to total production (Figure 4). This was the fifth consecutive quarterly increase since September 2014.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production in Quarter 4 (Oct to Dec) 2015 compared with Quarter 3 (July to Sep) 2015 was machinery & equipment not elsewhere classified. This sub-sector decreased by 2.8% with a contribution of 0.1 percentage points to total production. This is the 6th consecutive quarterly decrease since June 2014.

Manufacturing output decreased by 1.7% between December 2014 and December 2015 and provided a contribution of 1.2 percentage points to total production. Output decreased in 8 of the 13 manufacturing subsectors compared with a year ago (Figure 5). The manufacturing subsector with the largest downward contribution to total production output was the manufacture of machinery & equipment not elsewhere classified which decreased by 13.5% and contributed 0.6 percentage points to total production. This was the 13th consecutive decrease since November 2014 and anecdotal evidence suggested that there was a general decrease across the industry compared with a year ago.

In contrast, the manufacturing sub-sector with the largest upward contribution to total production compared with a year ago was the manufacture of transport equipment. This sub-sector increased by 5.9% and contributed 0.5 percentage points to total production, the 16th consecutive increase since August 2014. The largest contribution to the growth within this sub-sector came from the manufacture of motor vehicles, trailers & semi trailers, which increased by 7.6% and contributed 0.4 percentage points to total production.

Manufacturing output decreased by 0.2% between November 2015 and December 2015, the third consecutive decrease since September 2015. There were decreases in 8 of the 13 manufacturing sub-sectors (Figure 6). The manufacturing sub-sector with the largest downward contribution to total production was the manufacture of wood, paper products & printing, which decreased by 2.1% and contributed 0.1 percentage points to total production. This followed a rise of 1.8% in the previous month.

In contrast, the manufacturing sub-sector with the largest upward contribution to total production was the manufacture of computer, electronic & optical products, which increased by 2.4% and contributed 0.1 percentage points to total production. This followed a decrease of 0.6% in the previous month. Anecdotal evidence cited increased sales and exports as contributing factors.

Mining & quarrying

Mining & quarrying output decreased by 2.3% in Quarter 4 (Oct to Dec) 2015 compared with Quarter 3 (July to Sep) 2015 with a contribution of 0.3 percentage points to total production. This decrease was larger than forecasted within the latest preliminary estimate of GDP. The sub-sector with the largest contribution to this quarterly decrease was the extraction of crude petroleum & natural gas, which decreased by 2.5% and contributed 0.3 percentage points to total production (Figure 4).

Mining & quarrying output increased by 7.4% between December 2014 and December 2015 and contributed 0.9 percentage points to total production. The sub-sector with the largest contribution was the extraction of crude petroleum & natural gas, which increased by 14.3% and contributed 1.3 percentage points to total production (Figure 4). Anecdotal evidence suggested limited maintenance to oil and gas facilities this year, in comparison with the previous year, was a contributing factor.

Mining & quarrying output decreased by 4.0% in December 2015 compared with November 2015, having decreased by 1.4% the previous month. The sub-sector with the largest contribution to the fall was the extraction of crude petroleum & natural gas, which decreased by 4.6% and contributed 0.5 percentage points to total production (Figure 5).

Electricity, gas, steam & air conditioning

Electricity, gas, steam & air conditioning output decreased by 2.4% in Quarter 4 (Oct to Dec) 2015 compared with Quarter 3 (July to Sep) 2015, having increased by 0.9% the previous quarter (Figure 4). This decrease was larger than the forecasted decrease of 0.2% contained within the recent preliminary estimate of GDP. Downward revisions to this sector’s initial forecast were submitted by the Department of Energy and Climate Change (DECC), caused by the receipt of new data to replace early estimates. This fall reflected a decrease in output in both of its subsectors, with the largest contribution coming from the manufacture of gas & distribution of gaseous fuels through mains, which decreased by 5.5% and contributed 0.1 percentage points to total production. The warmer than average temperature was cited as a contributing factor to the fall in both subsectors.

Electricity, gas, steam & air conditioning output decreased by 6.6% in December 2015 compared with December 2014, contributing 0.6 percentage points to total production (Figure 5). This followed three consecutive increases since August 2015. This reflected decreases in output in both of its sub-sectors; the manufacture of gas & distribution of gaseous fuels through mains and electric power generation, transmission & distribution decreased by 13.2% and 4.4% respectively with each contributing 0.3 percentage points to total production. Evidence cited the warmer than average temperature in December 2015 as a contributing factor.

Electricity, gas, steam & air conditioning output decreased by 5.4% in December 2015 compared with November 2015 and contributed 0.5 percentage points to total production (Figure 6). This reflected a decrease in output in both of its sub-sectors; the largest contribution came from electric power generation, transmission and distribution, which decreased by 4.3% and contributed 0.3 percentage points to total production (Figure 5). Evidence suggested that the temperature in December 2015, which was 4.1 degrees Celsius warmer than the long term average (source Met office) contributed to the decrease in demand.

Water & waste management

Water supply, sewerage & waste management output decreased by 0.4% in Quarter 4 (Oct to Dec) 2015 compared with Quarter 3 (July to Sep) 2015 with a negligible contribution to total production (Figure 4). This decrease was the same as the forecasted decrease contained within the recent preliminary estimate of GDP. The largest contribution to the decrease came from waste collection, treatment & disposal activities, which decreased by 1.6% and contributed 0.1 percentage points to total production.

Water supply, sewerage & waste management output increased by 5.7% in December 2015 compared with December 2014 and contributed 0.5 percentage points to total production. This reflected increases in 3 of its 4 sub-sectors’ output (Figure 5), with the largest contribution coming from sewerage, which increased by 16.3% and contributed 0.4 percentage points to total production.

Water supply, sewerage & waste management output increased by 0.6% between November 2015 and December 2015 and contributed 0.1 percentage points to total production. This increase reflected increases in 3 of its 4 sub-sectors. The largest contribution to the increase came from waste collection, treatment & disposal activities, which increased by 1.3% and contributed 0.1 percentage points to total production, having decreased by 2.7% in the previous month (Figure 6).

Revisions to IoP

Revisions to the Index of Production follow the National Accounts Revisions policy (41.6 Kb Pdf). Revisions are caused by a number of factors including, but not limited to revisions to source data due to late responses to the Monthly Business Survey (MBS), actual data replacing forecast data and revisions to seasonal factors that are re-estimated every period.

We produce revisions triangles of production and manufacturing growth to provide users with one indication of the reliability of this important indicator. Statistical tests are performed on the average revision to test if it is statistically significantly different from zero. Further information can be found in background note 6.

In this release of data, the first period open for revision was January 2015. There were no revisions to IoP month-on-month growth rates greater than 0.1 percentage points. Further details on the revisions to IoP components can be found in the IOP5R tables, located within the data section of this release.

In 2015 the index of production (IoP) grew for a second consecutive year. However the growth of 1.0% in 2015 was slightly slower than the 1.3% growth seen in 2014. Despite the slight slowdown in growth, output grew faster than the compound average growth rate prior to the downturn (0.9% per year from 1993 to 2007) and following the downturn (at 0.2% per year from 2010 to 2015). Even though the IoP grew in 2015, manufacturing which has the largest weight in production (69.1% as of 2012) contracted by 0.2% in 2015, following a growth of 2.7% in 2014. The contraction seen by manufacturing in 2015 is below the sector’s pre-downturn and post-downturn compound average growth rates of 0.9% and 1.1% per year, respectively. A compound average growth is the rate at which a series would have increased or decreased if it had grown or fallen at a steady rate over a number of periods.

Figure 7 plots annual growth rates of production and manufacturing since 1949, and shows that the growth of the two series has been more subdued in the decade prior to the downturn and post-downturn compared with the compound average growth rate from 1949 to 1973, when production accounted for a much higher share of total Gross Value Added (GVA) (An International Perspective on the UK - Gross Domestic Product). Production and manufacturing growth is shown to have decoupled recently; in the historical averages shown the two series were more closely aligned. There was a period of substantial divergence in the late 1970s to late 1980s which can be attributed to strong compound average growth rate in the mining & quarrying and the electricity, gas, steam & air conditioning sectors over the period.

Figure 8 breaks down total production growth into the contributions from its main sectors, for both the latest year and the long run average (from 1992 to 2014). From 1992 to 2014 mining & quarrying, on average, made a negative contribution to production at 0.3 percentage points per year. However in 2015 the sector had the largest positive contribution to production at 0.9 percentage points, which was the first positive contribution to growth from the sector since 1999. Water supply, sewerage & waste management and electricity, gas, steam & air conditioning output also made positive contributions to production growth in 2015, continuing the trend of positive long run average contributions to growth. In 2015 manufacturing was the only main sector to have a negative contribution to the IoP at 0.1 percentage points when compared to its long run average contribution of a growth of 0.2 percentage points per year.

Within manufacturing, there was a large variation in the performances of the different sub-sectors. Figure 9 further breaks down total manufacturing growth into the contributions from its 13 sub-sectors, for both the latest year and the long run average (from 1992 to 2014). This shows that 8 of the 13 manufacturing sub-sectors had negative contributions to growth in 2015, with machinery and equipment not elsewhere classified having the largest negative contribution at 1.0 percentage points. This compares to only 4 of the 13 manufacturing sub-sectors having negative contributions to growth on average from 1992 to 2014 of which the textile, wearing apparel & leather products sub-sector provided the largest negative contribution (0.1 percentage points per year). However, in 2015, 4 of the 13 sub-sectors of manufacturing had positive contributions to growth, notably transport equipment, chemicals & chemical products and coke & refined petroleum products, which made larger contributions to growth than their long run averages.