Index of Production, UK:: June 2016

Total production output is estimated to have increased by 2.1% between Quarter 1 (Jan to Mar) 2016 and Quarter 2 (Apr to Jun) 2016. This increase was unchanged from the forecast contained within the Gross domestic product, preliminary estimate: Apr to June 2016. Hence there is no impact on the previously published GDP estimate for Quarter 2 (Apr to Jun) 2016.

The largest contribution to the quarterly increase in total production came from manufacturing, which increased by 1.8%. The largest contribution to the increase in manufacturing came from the manufacture of transport equipment, which increased by 5.6%.

Total production output is estimated to have increased by 1.6% in June 2016 compared with June 2015. There were increases in all of the main sectors, with the largest contribution coming from manufacturing (the largest component of production), which increased by 0.9%.

Total production output is estimated to have increased by 0.1% in June 2016 compared with May 2016. There were increases in 3 of the 4 main sectors, with the only downward contribution coming from manufacturing, which decreased by 0.3%. There were decreases in 9 of the 13 manufacturing subsectors, with the largest contribution coming from the manufacture of transport equipment, which decreased by 1.0%.

In the 3 months to June 2016, production and manufacturing were 7.4% and 4.5% respectively below the level they reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

The earliest period open for revision in this release was April 2016.

This bulletin presents the monthly estimates of the Index of Production (IoP) for the UK production industries, June 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.

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 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
• 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 March 2014 to June 2016.

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. We previously announced that research was under way to attempt to measure the standard error and the results of this would be published on completion. 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 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.

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 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 slightly rose in June 2016, following a fall in May. Overall, the level of production in the latest month was 1.6% higher than the level in June 2015 and 3.3% above its level in June 2014. Production output increased by 2.1% in Quarter 2 (Apr to June) 2016 following 2 quarters of contraction, raising the level of production output to its highest level since Quarter 4 (Oct to Dec) 2010.

Throughout the previous 12 months, manufacturing – the largest component of production – has experienced alternating periods of expansion and contraction. As a result, manufacturing output was 0.9% higher in June 2016 than in June 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 0.6% 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 1.0% 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. The path of mining & quarrying has continued 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 7.4% and 4.5%, 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 28.6% and 7.4%, 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 13.6%, 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 Gross domestic product, preliminary estimate: 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: July 2016, EMP13).

Since mid-2014 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 0.5% in the year to June 2016, from a fall of 4.4% in the year to May 2016. Output prices have also experienced deflation, falling by 0.4% in the year to June 2016 (more information can be found in Producer Price Inflation: June 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 April 2016 are open for revision, in line with the National Accounts revisions policy.

The Gross domestic product, preliminary estimate: Apr to June 2016, published on 27 July 2016, contained a forecasted increase of 2.1% for production in Quarter 2 (Apr to June) 2016. This release also estimates that production increased by 2.1% in Quarter 2 (Apr to June) 2016; therefore there is no impact on the recently published GDP.

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 June 2016 will be published on 12 August 2016 and services output for the same period on 26 August 2016.

Total production

Total production increased by 2.1% in Quarter 2 (Apr to June) 2016 compared with Quarter 1 (Jan to Mar) 2016 (Table 4), the largest quarterly increase since Quarter 3 (July to Sep) 1999, when growth in total production increased by the same amount. This increase was the same as the estimated increase of 2.1% contained within the Gross domestic product, preliminary estimate: Apr to June 2016. The quarterly increase in total production reflected rises in all of its 4 main sectors, with manufacturing (the largest component of production) having the largest contribution, increasing by 1.8% and contributing 1.2 percentage points to total production. There were also increases in electricity, gas, steam & air conditioning output of 4.5%; in mining & quarrying of 1.9% and in water supply, sewerage & waste management of 2.7%.

Total production output in June 2016 increased by 1.6% compared with June 2015 (Table 5), the sixth consecutive increase since December 2015. This increase reflected rises in all of its 4 main sectors, with manufacturing having the largest contribution, increasing by 0.9% and contributing 0.7 percentage points to total production. There were also increases in water supply, sewerage & waste management of 5.5%; in electricity, gas, steam & air conditioning output of 3.7% and in mining & quarrying, which increased by 1.1%.

Between May 2016 and June 2016, total production increased by 0.1% (Table 6), following a fall of 0.6% in the previous month. This increase was lower than the estimated increase of 0.2% contained within the Gross domestic product, preliminary estimate: Apr to June 2016. This increase reflected increases in 3 of its 4 main sectors, with mining & quarrying having the largest upward contribution, increasing by 1.2% and contributing 0.2 percentage points to total production. Electricity, gas, steam & air conditioning output increased by 0.9% and contributed 0.1 percentage points to total production and water supply, sewerage & waste management increased by 0.5% with a negligible contribution to total production. These increases were partially offset by a decrease in manufacturing of 0.3% contributing -0.2 percentage points to total production. This decrease was larger than the estimated decrease of 0.2% contained within the Gross domestic product, preliminary estimate: Apr to June 2016.

Manufacturing

Manufacturing output increased by 1.8% in Quarter 2 (Apr to Jun) 2016 compared with Quarter 1 (Jan to Mar) 2016, in line with the estimate of 1.8% contained within the Gross domestic product, preliminary estimate: Apr to June 2016. Output increased in 9 of the 13 manufacturing sub-sectors (Table 4). The manufacturing sub-sector with the largest upward contribution to total production output was the manufacture of transport equipment, which increased by 5.6% and contributed 0.6 percentage points to total production. This was the largest quarterly increase since Quarter 2 (Apr to Jun) 2010 of 5.8%, following a decrease of 1.2% in the previous quarter. The largest contribution within this sub-sector came from the manufacture of motor vehicles, trailers & semi-trailers, which increased by 8.4% and contributed 0.5 percentage points to total production. The quarterly increase in this industry was due to the increase in growth in the month of April 2016, during which increased sales and exports were contributing factors.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production in Quarter 2 (Apr to Jun) 2016 was the manufacture of basic metals & metal products (for further information on the characteristics of this industry see previous spotlight). This sub-sector decreased by 1.5% with a contribution of -0.1 percentage points to total production. The largest contribution to the decrease within this sub-sector came from the manufacture of weapons & ammunition, which decreased by 12.7% and contributed -0.1 percentage points to total production.

Manufacturing output increased by 0.9% between June 2015 and June 2016, contributing 0.7 percentage points to total production. Output increased in 7 of the 13 manufacturing sub-sectors compared with a year ago (Table 5). The manufacturing sub-sector with the largest upward contribution to total production output was the manufacture of transport equipment, which increased by 5.9% 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 7.7% and contributed 0.4 percentage points to total production.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production output was the manufacture of basic metals & metal products, which decreased by 6.0% (the 12th consecutive decrease since June 2015) and contributed -0.5 percentage points to total production. The largest downward contribution within this sub-sector came from the manufacture of basic iron & steel, which decreased by 36.4% and contributed -0.3 percentage points to total production. Evidence from the International Steel Statistics Bureau suggested the fall in crude steel production in recent months compared with the previous year was a contributing factor.

Manufacturing output decreased by 0.3% between May 2016 and June 2016 and contributed -0.2 percentage points to total production. This followed a decrease of 0.6% in the previous month. There were decreases in 9 of the 13 manufacturing sub-sectors (Table 6) with the largest downward contribution coming from the manufacture of transport equipment, which decreased by 1.0% and contributed -0.1 percentage points to total production. The largest contribution to the decrease within the manufacture of transport equipment came from the manufacture of motor vehicles, trailers & semi-trailers which decreased by 2.3% and contributed -0.1 percentage points to total production.

In contrast, the manufacturing sub-sector with the largest upward contribution to total production in June 2016 compared with May 2016 was other manufacturing & repair, which increased by 3.3% and contributed 0.2 percentage points to total production. For more information on the characteristics of this industry see the previously published spotlight. The largest upward contribution within this sub-sector came from the rest of repair & installation, which increased by 10.4% and contributed 0.2 percentage points to total production. Anecdotal evidence suggested contract related activities were a contributing factor.

Mining & quarrying

Mining & quarrying output increased by 1.9% in Quarter 2 (Apr to Jun) 2016, contributing 0.2 percentage points to total production, compared with an estimated increase of 1.4% contained within the Gross domestic product, preliminary estimate: Apr to June 2016. This was due to upward revisions to extraction of crude petroleum & natural gas estimates for April 2016 as a result of updated data from the source. The sub-sector with the largest contribution to this quarterly increase was the extraction of crude petroleum & natural gas, which increased by 2.0% and contributed 0.2 percentage points to total production (Table 4).

Mining & quarrying output increased by 1.1% in June 2016 compared with June 2015 and contributed 0.1 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 2.7% and contributed 0.3 percentage points to total production (Table 5). The Department for Business, Energy & Industrial Strategy (BEIS) advised the shut-down of one of the largest terminals due to maintenance in the previous year was a contributing factor to the increase in production.

Mining & quarrying output increased by 1.2% in June 2016 compared with May 2016 and contributed 0.2 percentage points to total production. This followed a decrease of 0.5% 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 1.5% and contributed 0.2 percentage points to total production (Table 6) which followed a decrease of 0.6% in the previous month.

Electricity, gas, steam & air conditioning

Electricity, gas, steam & air conditioning output increased by 4.5% in Quarter 2 (Apr to Jun) 2016 having increased by 0.7% in the previous quarter (Table 4). This is the highest quarterly increase since Quarter 2 (Apr to June) 2012 (an increase of 8.4%). This increase was slightly less than the 4.7% increase forecasted within the recent Gross domestic product, preliminary estimate: Apr to June 2016. The increase in electricity, gas, steam & air conditioning output reflected a rise in output in both of its 2 sub-sectors. The main contributor to the increase was the manufacture of gas & distribution of gaseous fuels through mains, which increased by 10.1% and contributed 0.3 percentage points to total production. This is the highest quarterly increase since Quarter 3 (July to Sep) 2014 (an increase of 13.5%). Evidence from BEIS suggested an increase in the use of gas for the purpose of generating electricity was a contributing factor to the rise in production.

Electricity, gas, steam & air conditioning output increased by 3.7% in June 2016 compared with June 2015 and contributed 0.4 percentage points to total production (Table 5). This was the fourth consecutive increase. This increase reflected a rise in output in both of its 2 sub-sectors. The main contributor to the increase was the manufacture of gas & distribution of gaseous fuels through mains, which increased by 12.6% and contributed 0.3 percentage points to total production. This was the sixth consecutive increase since December 2015, following an increase of 15.8% 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 0.9% in June 2016 compared with May 2016 and contributed 0.1 percentage points to total production (Table 6). This followed a decrease of 2.9% 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 2.4% and contributed 0.2 percentage points to total production. This followed a decrease of 1.5% in the previous month. Evidence from BEIS suggested an increase in the share of cheaper fuel mix at the expense of gas was a contributing factor to the rise.

Water & waste management

Water supply, sewerage & waste management output increased by 2.7% in Quarter 2 (Apr to Jun) 2016 compared with Quarter 1 (Jan to Mar) 2016 and contributed 0.2 percentage points to total production (Table 4). This increase was slightly higher than the forecasted increase of 2.6% contained within the recent Gross domestic product, preliminary estimate: Apr to June 2016. The largest contribution to the increase came from waste collection, treatment & disposal activities, which increased by 6.8% and contributed 0.2 percentage points to total production. Anecdotal evidence suggested an increase in some of the recycling production activities was a contributing factor.

Water supply, sewerage & waste management output increased by 5.5% in June 2016 compared with June 2015 and contributed 0.4 percentage points to total production. This reflected increases in 3 of its 4 sub-sectors’ output (Table 5), with the largest contribution coming from waste collection, treatment & disposal activities, which increased by 15.0% and contributed 0.5 percentage points to total production.

Water supply, sewerage & waste management output increased by 0.5% between May 2016 and June 2016 and had a negligible contribution to total production (Table 6). This increase reflected increases in 3 of its 4 subsectors’ output, with the largest contribution coming from waste collection, treatment & disposal activities, which increased by 1.9%, the seventh consecutive increase and contributed 0.1 percentage points to total production.

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 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, periods back to April 2016 were open for revision.

In April 2016, there was an upward revision of 0.2 percentage points to the IoP month-on-month growth rate, from a rise of 2.1% to 2.3%. This was mainly attributed to an upward revision to the extraction of crude petroleum & natural gas from a fall of 1.4% to a rise of 0.4%. The Department for Business, Energy & Industrial Strategy (BEIS) advised this was as a result of updated data from the source.

Further details on the revisions to IoP components can be found in the IOP5R tables, located within the dataset section of this release.

The manufacture of chemicals & chemical products (industry CE) is a subsector of manufacturing, the largest component of production. According to the standard industrial classification (SIC07) this industry includes the transformation of organic and inorganic raw materials by a chemical process and the formation of products. The sub-group breakdown distinguishes the production of basic chemicals from the production of intermediate and end products produced by further processing of basic chemicals that make up the remaining industry classes.

In 2013, chemicals & chemical products accounts for around 5.7% of total manufacturing output (and 4.0% of total production output). The chemicals & chemical products sector can be broken down into six smaller groups: industrial gases, inorganics & fertilizers (industry 20A), petrochemicals (20B), dyestuffs & agro-chemicals (20C), paints, varnishes & similar coatings (20.3), soaps, detergents & cleanings products (20.4) and other chemical products (20.5). Soaps, detergents & cleanings products is the largest group (23.7%) and dyestuffs & agro-chemicals is the smallest (8.8%) of chemicals & chemical products.

Figure 4 shows that chemicals & chemical products has generally outperformed manufacturing over time, although it has experienced slightly more volatility. Before the downturn, from Quarter 2 (Apr to June) 1997 to Quarter 1 (Jan to Mar) 2008, manufacturing output grew at a compound average growth rate of 0.1% per quarter, whilst chemicals & chemical products grew at a faster rate of 0.3% per quarter. However, the economic downturn (between Quarter 1 (Jan to Mar) 2008 and Quarter 2 (Apr to June) 2009) affected manufacturing severely and chemicals & chemical products even more so. Manufacturing output contracted by 12.2% while the output of chemicals & chemical products contracted by 17.3% over the same period.

Following the downturn (from Quarter 3 (July to Sep) 2009 to Quarter 2 (Apr to June) 2016) manufacturing has recovered somewhat but remains 4.5% below its level in Quarter 1 (Jan to Mar) 2008. Chemicals & chemical products has also somewhat recovered (at a compound average growth rate of 0.3% per quarter) but the industry remains 9.6% below its Quarter 1 (Jan to Mar) 2008 level.

Figure 5 shows that the quarterly performance of the individual components of chemicals & chemical products has been quite volatile.

Petrochemicals saw the sharpest fall in output during the downturn (Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June)), and despite some growth since then, in Quarter 2 (Apr to June) 2016 it remains 27.3% below its peak in Quarter 3 (July to Sep) 2008. In contrast, soaps, detergents & cleanings products was much more modestly impacted by the downturn and has performed very strongly since Quarter 3 (July to Sep) 2010, with a compound average growth rate of 1.3% per quarter.

The Index of Production Quality and Methodology Information document contains important information on:

• the strengths and limitations of the data
• the quality of the output: including the accuracy of the data, how it compares with related data
• uses and users
• how the output was create