Index of Production, UK: July 2016

This is the first release of Index of Production (IoP) covering data post EU referendum. The release shows production is relatively flat month on month in July 2016 with a fall in manufacturing negated by a rise in oil and gas. Users should note that ONS always warns against overly interpreting one month's figures.

In July 2016, total production output was estimated to have increased by 2.1% compared with July 2015. All main sectors saw production increase with mining & quarrying providing the largest contribution to growth, increasing by 7.2%.

Manufacturing was estimated to have increased by 0.8% over the same period. Transport equipment provided the largest contribution to growth, increasing by 5.7%.

Comparing July 2016 with June 2016, production output is estimated to have increased by 0.1%.

Manufacturing was the only sector to contract from June 2016, falling by 0.9% with the largest contribution from pharmaceuticals. However, this was offset by growth in the other three sectors, particularly mining & quarrying, which increased by 4.7%.

In the 3 months to July 2016, total production and manufacturing output increased by 1.0% and 0.5% respectively on the previous 3 months.

In the 3 months to July 2016, production and manufacturing were 7.6% and 5.2% respectively below their level reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

The earliest period open for revision in this release was January 2015. There were no revisions to the IoP quarter-on-quarter growth rates greater than 0.1%, providing no change to previously published GDP growth rates.

This bulletin presents the monthly estimates of the Index of Production (IoP) for the UK production industries, for July 2016. 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. In this publication, the production industries weight accounts for 14.6% of the output approach to the measurement of gross domestic product (GDP).

IoP values are referenced to 2013 so that the average for 2013 is equal to 100. Therefore, an index value of 110 would indicate that output is 10% higher than the average for 2013. The index estimates are mainly based on the 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
• gross domestic product (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 April 2014 to July 2016.

We have developed guidelines for measuring statistical quality; these are based upon the 5 European Statistical System (ESS) quality dimensions. The Index of Production (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, all survey-based estimates, by definition, 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. However, the IoP is constructed from a variety of data sources, some of which are not based on random samples. We previously announced that research was under way to attempt to measure the standard error; this work has been completed and published in Survey Methodology Bulletin No.75 Spring 2016 using the standard errors of the growths for the year 2014. We are working on updating this for regular publication as part of this release.

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 Monthly Business Survey (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.

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 notes.

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 Quality and Methodology Information report. 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 rose slightly in July, following zero growth in June. Total production was 2.1% higher than in July 2015 and 2.9% above the level in July 2014. In the latest quarter (Quarter 2 (Apr to June) 2016), production output increased by 2.1% compared to Quarter 1 (Jan to Mar) 2016 following two quarters of contraction.

Since July 2015, manufacturing, the largest component of production, has been volatile with no obvious underlying pattern. In July 2016, manufacturing output contracted compared with June 2016 but remains 0.8% higher when compared with July 2015 (for more information and analysis of the latest figures see the production and sectors supplementary analysis section of the bulletin).

Looking over a longer-term period – from Quarter 2 (Apr to June) 1997 to Quarter 2 (Apr to June) 2016 – production and its main components have followed very different paths (Figure 2). Over this period, the electricity, gas, steam & air conditioning and water supply, sewerage & waste management industries grew at compound average growth rates of 0.2% and 0.5% per quarter respectively, while production as a whole contracted at a compound average growth rate of 0.1% per quarter. Over the same period, mining & quarrying contracted at a compound average growth rate of 0.9% per quarter while manufacturing output is broadly unchanged. 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 economy’s downturn (between 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 shows little sign of the economy’s downturn, with its output continuing to decline (Figure 2). Between the economy’s peak in Quarter 1 (Jan to Mar) 2008 and the economy’s trough in Quarter 2 (Apr to June) 2009, manufacturing experienced the largest contraction (12.2%) followed by total production (10.5%) water supply, sewerage & waste management (9.0%), mining & quarrying (7.5%) and electricity, gas, steam & air conditioning (3.5%).

In Quarter 2 (Apr to June) 2016, production and manufacturing output remained below their Quarter 1 (Jan to Mar) 2008 levels by 7.5% and 4.7%, respectively. Moreover, in Quarter 2 (Apr to June) 2016, mining & quarrying and electricity, gas, steam & air conditioning output were also below their respective values in Quarter 1 (Jan to Mar) 2008 by 27.8% and 7.9%, respectively. In contrast, water supply, sewerage & waste management is the only main industry within production to have surpassed its value in Quarter 1 (Jan to Mar) 2008, by 13.1%, as of Quarter 2 (Apr to June) 2016.

Headline GDP surpassed its pre-downturn peak in Quarter 3 (July to Sep) 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 Second estimate of GDP: Quarter 2 (Apr to June 2016) and Labour productivity: Jan to Mar 2016). 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 9.6% between 1997 and 2015 (UK Labour Market: August 2016, EMP13).

In July 2016 the manufacturing industry experienced inflation 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 rose by 4.3% in the year to July 2016, from a fall of 0.5% in the year to June 2016. Output prices for goods produced by UK manufacturers rose by 0.3% in the year to July 2016, from a fall of 0.2% in the year to June 2016. This is the first time both input and output producer prices have been positive since mid-2014, although this is not a sudden shift: both series have been trending towards positive territory in recent months (more information can be found in Producer Price Inflation: July 2016).

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 21.7%, around the middle of the range relative to the other economies. By 2014, the UK had become relatively less reliant on production, as its share fell to 14.2% of nominal GVA.

The same trend was observed in manufacturing, where the share of nominal GVA fell from 17.1% in 1997 to 10.2% in 2014. Moreover, between 1997 and 2014, the composition of production in the UK changed, with the share of production attributed to manufacturing decreasing from 78.7% in 1997 to 71.6% in 2014.

In this release, periods back to January 2015 are open for revision, in line with the National Accounts revisions policy.

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). 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 July 2016 will be published on 09 September 2016 and services output for the same period on 30 September 2016.

Total production

Total production output in July 2016 increased by 2.1% compared with July 2015 (Table 4), the seventh consecutive increase since December 2015. This increase reflected rises in all of its 4 main sectors, with mining & quarrying having the largest contribution, increasing by 7.2% and contributing 0.9 percentage points to total production. There were also increases in manufacturing of 0.8%; water supply, sewerage & waste management of 4.4% and in electricity, gas, steam & air conditioning output, which increased by 3.1%.

Between June 2016 and July 2016, total production increased by 0.1% (Table 5), following a negligible rise of 0.0% (to 1 decimal place) in the previous month. This increase reflected rises in 3 of its 4 main sectors, with mining & quarrying having the largest upward contribution, increasing by 4.7% and contributing 0.6 percentage points to total production. Water supply, sewerage & waste management increased by 0.6% and electricity, gas, steam & air conditioning output increased by 0.4%, both having a negligible contribution to total production. These increases were largely offset by a decrease in manufacturing of 0.9%, which contributed -0.6 percentage points to total production.

Manufacturing

Manufacturing output increased by 0.8% between July 2015 and July 2016, contributing 0.5 percentage points to total production. Output increased in 6 of the 13 manufacturing sub-sectors compared with a year ago (Table 4). The manufacturing sub-sector with the largest upward contribution to total production output was the manufacture of transport equipment, which increased by 5.7% and contributed 0.6 percentage points to total production. The largest contribution within this sub-sector came from the manufacture of motor vehicles, trailers & semi-trailers, which increased by 9.0% and contributed 0.5 percentage points to total production. This was the fifth consecutive increase on a year ago and anecdotal evidence suggested increased sales and exports between these periods.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production output between July 2015 and July 2016 was the manufacture of basic pharmaceutical products & pharmaceutical preparations, which decreased by 5.3% and contributed -0.3 percentage points to total production.

Manufacturing output decreased by 0.9% between June 2016 and July 2016 and contributed -0.6 percentage points to total production. This followed a decrease of 0.2% in the previous month. There were decreases in 9 of the 13 manufacturing sub-sectors (Table 5) with the largest downward contribution coming from the manufacture of basic pharmaceutical products & pharmaceutical preparations, which decreased by 5.6% and contributed -0.3 percentage points to total production.

In contrast, the manufacturing sub-sector with the largest upward contribution to total production in July 2016 compared with June 2016 was the manufacture of machinery & equipment not elsewhere classified, which increased by 3.9% and contributed 0.2 percentage points to total production. For more information on the characteristics of this industry see the previously published spotlight.

Mining & quarrying

Mining & quarrying output increased by 7.2% in July 2016 compared with July 2015 and contributed 0.9 percentage points to total production. The sub-sector with the largest contribution to the increase was the extraction of crude petroleum & natural gas, which increased by 10.4% and contributed 1.1 percentage points to total production (Table 4). The Department for Business, Energy & Industrial Strategy (BEIS) advised the shut-down of one of the largest terminals, Sullom Voe, due to maintenance in July 2015 was a contributing factor to the increase in production on a year ago. In addition, the delayed planned maintenance in the Buzzard oil field from July 2016 into subsequent months has also contributed to the increase on a year ago.

Mining & quarrying output increased by 4.7% in July 2016 compared with June 2016 and contributed 0.6 percentage points to total production. This followed an increase of 1.6% in the previous month. The sub-sector with the largest contribution to the increase was the extraction of crude petroleum & natural gas, which increased by 5.6% and contributed 0.6 percentage points to total production (Table 5) following an increase of 1.8% in the previous month.

Electricity, gas, steam & air conditioning

Electricity, gas, steam & air conditioning output increased by 3.1% in July 2016 compared with July 2015 and contributed 0.3 percentage points to total production (Table 4). This was the fifth consecutive increase. This increase reflected a rise in output in 1 of its 2 sub-sectors. The manufacture of gas & distribution of gaseous fuels through mains increased by 14.1% and contributed 0.4 percentage points to total production. This was the sixth consecutive increase since January 2016, following an increase of 13.3% in the previous month. Evidence from BEIS indicated the increase was a result of a substantial increase in electricity generated from gas at the expense of coal, as a result of reduced coal generating capacity.

Electricity, gas, steam & air conditioning output increased by 0.4% in July 2016 compared with June 2016, with a negligible contribution to total production (Table 5), following a decrease of 0.5% in the previous month. The increase in electricity, gas, steam & air conditioning output reflected a rise in output in 1 of its 2 sub-sectors; electric power generation, transmission & distribution, which increased by 1.1% and contributed 0.1 percentage points to total production. This followed an increase of 0.5% in the previous month. Evidence from BEIS suggested the increase in output was due to an increase in demand and was marginally offset by a slightly more expensive fuel mix.

Water & waste management

Water supply, sewerage & waste management output increased by 4.4% in July 2016 compared with July 2015 and contributed 0.3 percentage points to total production. This reflected increases in all of its 4 sub-sectors’ output (Table 4), with the largest contribution coming from waste collection, treatment & disposal activities, which increased by 6.7% and contributed 0.2 percentage points to total production.

Water supply, sewerage & waste management output increased by 0.6% between June 2016 and July 2016 with a negligible contribution to total production (Table 5). This increase reflected rises in 2 of its 4 subsectors’ output, with the largest upward contribution coming from water collection, treatment & supply, which increased by 3.8%, following a decrease of 4.1% in the previous month.

Revisions to IoP

Revisions to the Index of Production follow the National Accounts Revisions policy. 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 an 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 earliest 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 dataset section of this release.

Electricity, gas, steam & air conditioning supply (Sector D) accounts for 10.4% of total production output. According to the standard industrial classification (SIC07) the industry includes the operation of electric and gas utilities, which generate, control and distribute electric power or gas. Also included are air conditioning and the provision of steam and hot water for heating purposes. The industry is divided into 2 sub-industries electric power generation, transmission & distribution (sub-industry 35.1) and manufacture of gas, distribution of gaseous fuels via mains; steam & air conditioning supply (sub-industry 35.2-3).

Figure 4 shows that electricity, gas, steam & air conditioning supply has consistently outperformed the total index of production over time, although it is much more volatile. Before the downturn, from Quarter 2 (Apr to June) 1997 to Quarter 1 (Jan to Mar) 2008, the industry grew at a compound average growth rate of 0.6% per quarter, while total production’s compound average growth rate was broadly zero. During the economic downturn (between Quarter 1 (Jan to Mar) 2008 and Quarter 2 (Apr to June) 2009) total production contracted by 10.5%, but electricity, gas, steam & air conditioning supply was less affected, contracting by only 3.5% over the same period.

However, since the downturn (from Quarter 3 (July to Sep) 2009 to Quarter 2 (Apr to June) 2016), electricity, gas, steam & air conditioning supply failed to recover with its output contracting at a compound average growth rate of 0.2% per quarter. In contrast, following the downturn total production grew at a compound average growth rate of 0.1% per quarter. Despite the differing growth paths following the downturn in Quarter 2 (Apr to June) 2016 both the industry and production were below their Quarter 1 (Jan to Mar) 2008 levels by 7.9% and 7.5%, respectively.

Figure 5 shows that the quarterly performance of the two components of electricity, gas, steam & air conditioning supply have been quite volatile (particularly manufacture of gas, distribution of gaseous fuels via mains; steam & air conditioning supply). Electric power generation, transmission & distribution is the larger of the two components, accounting for around 70.7% of the industry.

Figure 5 also shows 3 distinct periods in the performance of the 2 sub-industries. Between Quarter 1 (Jan to Mar) 1997 and Quarter 4 (Oct to Dec) 2005 manufacture of gas, distribution of gas fuels via mains; steam & air conditioning supply broadly outperformed electric power generation, transmission & distribution. Between Quarter 1 (Jan to Mar) 2006 and Quarter 2 (Apr to June) 2010 the 2 sub-industries were broadly tracking each other while since Quarter 3 (July to Sep) 2010, electric power generation, transmission & distribution has consistently outperformed manufacture of gas, distribution of gaseous fuels via mains; steam & air conditioning supply, although both have followed broadly downward trends.

Some of the fluctuations in these series can be explained by unusual weather patterns. For example, December 2015 was an exceptionally warm month (and November was also unusually warm), while January, February and March 2016 were much closer to their long-term average temperatures. This partially explains the rebound in the performance of gas in Quarter 1 (Jan to Mar) 2016 (growth of 9.3% compared to Quarter 4 (Oct to Dec) 2016), as households increased their gas usage.