Index of Production, UK: May 2016

The data and revisions in this release are consistent with the Quarterly National Accounts published on 30 June 2016 and data used for Blue Book 2016 due for release on 29 July 2016.

Total production output is estimated to have increased by 1.4% in May 2016 compared with May 2015. There were increases in 3 of the 4 main sectors, with the largest contribution coming from manufacturing (the largest component of production), which increased by 1.7%.

The largest contribution to the increase in manufacturing came from the manufacture of transport equipment, which increased by 6.6%.

Total production output is estimated to have decreased by 0.5% in May 2016 compared with April 2016. There were decreases in 3 of the 4 main sectors, with the largest downward movement coming from manufacturing, which decreased by 0.5% and contributed -0.3 percentage points to total production.

The largest contribution to the decrease in manufacturing came from the manufacture of basic pharmaceutical products & pharmaceutical preparations, which decreased by 6.5%, having increased in the previous month by 9.0%.

In the 3 months to May 2016, production and manufacturing were 8.0% and 4.9% 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 January 1997. Revisions to Index of Production data up to Quarter 1 (Jan to Mar) 2016 are consistent with the Quarterly National Accounts publication released on 30 June 2016.

This bulletin presents the monthly estimates of the Index of Production (IoP) for the UK production industries, May 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. This was updated from 14.9% in line with the annual update (Blue Book 2016) of the weights used to construct the chained volume measures of output.

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 February 2014 to May 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, 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.

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 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 fell in May 2016, following growth in April and March 2016. Overall, the level of production in the latest month was 1.4% higher than the level in May 2015 and 3.2% above its level in May 2014. Over the quarter as a whole (Quarter 1 (Jan to Mar) 2016) production output contracted for a second consecutive quarter but remains 0.3% above its level in Quarter 1 (Jan to Mar) 2015.

Throughout the previous 12 months, manufacturing - the largest component of production - experienced alternating periods of expansion and contraction which have resulted in current manufacturing levels being 1.7% higher than those recorded in May 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 1 (Jan to Mar) 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 sectors 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 compound average growth rate of 1.0% per quarter while manufacturing was relatively stable. 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 was broadly unaffected by 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 in output (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 1 (Jan to Mar) 2016, production and manufacturing output remained below their Quarter 1 (Jan to Mar) 2008 levels by 9.3% and 6.2%, respectively. Moreover, in Quarter 1 (Jan to Mar) 2016, mining & quarrying and electricity, gas, steam & air conditioning output were 29.9% and 11.5% below their respective values in Quarter 1 (Jan to Mar) 2008. 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 10.5%, as of Quarter 1 (Jan to Mar) 2016.

Headline GDP surpassed its pre-downturn peak in Quarter 3 (July to Sept) 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 Quarterly National Accounts: Quarter 1 (Jan to Mar) 2016 and UK productivity: Oct to Dec 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 9.6% between 1997 and 2015 (UK Labour Market: June 2016, 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 3.9% in the year to May 2016, from a fall of 7.0% in the year to April 2016. Output prices have also experienced deflation, falling by 0.7% in the year to May 2016 (more information can be found in Producer Price Inflation: May 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 1997 are open for revision, in line with the National Accounts revisions policy and are consistent with the Quarterly National Accounts: Quarter 1 (Jan to Mar) 2016 publication released on 30 June 2016.

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 May 2016 will be published on 15 July 2016 and services output for the same period on 27 July 2016.

Total production

Total production output in May 2016 increased by 1.4% compared with May 2015 (Table 4), the fifth consecutive increase since December 2015. This increase reflected rises in 3 of its 4 main sectors, with manufacturing (the largest component of production) having the largest contribution, increasing by 1.7% and contributing 1.2 percentage points to total production. There were also increases in water supply, sewerage & waste management of 6.7% and in electricity, gas, steam & air conditioning output of 2.7%. These increases were partially offset by a decrease in mining & quarrying, which decreased by 4.2% and contributed -0.6 percentage points to total production.

Between April 2016 and May 2016, total production decreased by 0.5% (Table 5), following a rise of 2.1% in the previous month. This decrease reflected falls in 3 of its 4 main sectors, with manufacturing having the largest downward contribution, decreasing by 0.5% and contributing -0.3 percentage points to total production. This followed an increase of 2.4% in the previous month. The decrease in manufacturing was followed by decreases in electricity, gas, steam & air conditioning output, which fell by 2.9% and contributed -0.3 percentage points to total production; and in mining & quarrying, which decreased by 0.1% with a negligible contribution to total production. These decreases were partially offset by an increase in water supply, sewerage & waste management, which increased by 1.5% and contributed 0.1 percentage points to total production.

Manufacturing

Manufacturing output increased by 1.7% between May 2015 and May 2016, contributing 1.2 percentage points to total production. Output increased in 8 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 6.6% and contributed 0.7 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 9.5% and contributed 0.5 percentage points to total production. Anecdotal evidence suggested increased sales and exports were contributing factors.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production output was the manufacture of textiles, wearing apparel & leather products, which decreased by 12.0%, the fourth consecutive decrease since January 2016 and contributed -0.3 percentage points to total production. The largest downward contribution within this sub-sector came from the manufacture of wearing apparel, which decreased by 24.1% and contributed -0.3 percentage points to total production. Anecdotal evidence suggested a fall in exports compared with the previous year was a contributing factor.

Manufacturing output decreased by 0.5% between April 2016 and May 2016 and contributed -0.3 percentage points to total production. This followed an increase of 2.4% in the previous month. There were decreases in 7 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 6.5% and contributed -0.4 percentage points to total production. This followed an increase of 9.0% in the previous month.

In contrast, the manufacturing sub-sector with the largest upward contribution to total production in May 2016 compared with April 2016 was the manufacture of food products, beverages & tobacco, which increased by 1.4% and contributed 0.2 percentage points to total production. This was the largest increase since February 2014. There were small positive contributions from a number of industries within this sub-sector.

Mining & quarrying

Mining & quarrying output decreased by 4.2% in May 2016 compared with May 2015 and contributed -0.6 percentage points to total production. The sub-sector with the largest contribution to the fall was the extraction of crude petroleum & natural gas, which decreased by 4.2% and contributed -0.5 percentage points to total production (Table 4). The Department of Energy & Climate Change (DECC) advised that some partial shut downs due to maintenance were a contributing factor to the decrease in production.

Mining & quarrying output decreased by 0.1% in May 2016 compared with April 2016 and had a negligible contribution to total production. This is the third consecutive decrease since February 2016 and followed a decrease of 0.6% in the previous month. The sub-sector with the largest contribution to the fall was the extraction of crude petroleum & natural gas, which decreased by 0.2% and had a negligible contribution to total production (Table 5).

Electricity, gas, steam & air conditioning

Electricity, gas, steam & air conditioning output increased by 2.7% in May 2016 compared with May 2015 and contributed 0.3 percentage points to total production (Table 4). This was the third consecutive increase and having increased by 7.7% in the previous month. This increase reflected a rise in output in 1 of its 2 sub-sectors, the manufacture of gas & distribution of gaseous fuels through mains, which increased by 17.5%. This was the fifth consecutive increase since December 2015 and followed an increase of 29.1% in the previous month. Evidence from DECC 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 decreased by 2.9% in May 2016 compared with April 2016 and contributed -0.3 percentage points to total production (Table 5). The decrease in electricity, gas, steam & air conditioning output reflected falls in output in both of its sub-sectors. The sub-sector with the largest contribution was the manufacture of gas & distribution of gaseous fuels through mains, which decreased by 5.5% and contributed -0.2 percentage points to total production. This followed an increase of 12.6% in the previous month. Anecdotal evidence suggested contributing factors to the decrease in demand were the warmer than average temperature in May 2016 and an increase in the share of cheaper fuel mix at the expense of gas.

Water & waste management

Water supply, sewerage & waste management output increased by 6.7% in May 2016 compared with May 2015 and contributed 0.5 percentage points to total production. This reflected increases in 3 of its 4 sub-sectors’ output (Table 4), with the largest contribution coming from waste collection, treatment & disposal activities, which increased by 11.3% and contributed 0.4 percentage points to total production.

Water supply, sewerage & waste management output increased by 1.5% between April 2016 and May 2016 and contributed 0.1 percentage points to total production. This increase reflected increases in all of its 4 subsectors’ output, with the largest contribution coming from waste collection, treatment & disposal activities, which increased by 2.3%, the sixth 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, the earliest period open for revision is January 1997, as this dataset contains the annual updates that are also included in the Quarterly National Accounts: Quarter 1 (Jan to Mar) 2016 consistent with the Blue Book 2016 publication due to be published on 29 July 2016.

There are numerous sources of revision that have affected production in this bulletin, including but not limited to:

• the annual update of the weights used to construct the chained volume measures of output
• the annual update of seasonal adjustment models
• the published indices being re-referenced from 2012=100 to 2013=100
• methodological improvement
• updated source data

As is common for the first Index of Production publication following the annual updates, there are more and larger revisions than in an ordinary publication (see Table IOP5R which shows the revisions to IoP estimates against the previously published).

Further details of notable revisions to IoP data up to and including April 2016 and the associated impact on previously published GDP estimates up to Quarter 1 (Jan to Mar) 2016 can be found in the Quarterly National Accounts: Quarter 1 (Jan to Mar) 2016 released on 30 June 2016.

The release of Blue Book 2016 constitutes our annual update of the National Accounts. These (methodological and data) changes are designed to ensure that official statistics reflect the changing nature of the UK and global economies, to enable fair and meaningful international comparisons and to permit analysis of current economic trends on the best available data. The most recent article Impact of methods changes in the national accounts and economic commentary for Quarter1 (Jan to Mar) 2016, was published on our website on 30 June 2016. This article summarises the effects of methodological, classification and other changes implemented in the quarterly national accounts for the period 1997 to the first quarter of 2016.

The Blue Book 2016 revisions, which go back to January 1997, have affected the Index of Production (IoP) and its components. The main sources of the revision are the annual update of weights and seasonal adjustment models, re-referencing of the published indices from 2012 to 2013, methodological improvements and updated source data. As is common for the first IoP publication following the annual updates, there are larger revisions than in an ordinary publication.

The annual update of weights in Blue Book 2016 has decreased the production weight within total gross value added (GVA), from 148.9 parts per thousand (ppt) to 146.5ppt. The annual change in weights has also impacted all of the components of IoP. Table 4 shows that manufacturing is still the dominant industry within production, with its weight increasing from 690.8ppt in 2012 to 700.4ppt in 2013, (where the IoP weight is 1000). Electricity, gas, steam & air conditioning supply saw a rise in weight from 93.5ppt in 2012 to 104.5ppt in 2013 which was due to an increase in both of its sub-components – they both increased in weight by 5.5ppt. In contrast, mining & quarrying saw a decrease in weight from 134.6ppt in 2012 to 120.4ppt in 2013, mainly driven by the weight of extraction of crude petroleum & natural gas which fell from 106.5ppt in 2012 to 96.2ppt in 2013. Water & waste management also saw a decrease in weight from 81.1ppt in 2012 to 74.7ppt in 2013.

The Blue Book revisions to the IoP have also affected the level of output over time. However, the profile and performance of production remained broadly unchanged. Figure 4 shows the volume of production indexed to 100 in 2013. From Quarter 2 (Apr to June) 1997 to Quarter 3 (July to Sep) 2014, the Blue Book 2016 consistent estimate of the IoP contracted at broadly the same compound average growth rate (of 0.1 % per quarter) as previously published. However, from Quarter 4 (Oct to Dec) 2014 to Quarter 1 (Jan to Mar) 2016, the IoP grew at a slightly faster compound average growth rate (0.2% per quarter) than previously published estimates (0.1% per quarter). As a result of this, Quarter 1 (Jan to Mar) 2016 IoP was 9.3% below its level in Quarter 1 (Jan to Mar) 2008 revised up from 10.0% in the previously published estimate.

Data have also been revised for the components of production. The annual growth of manufacturing, the largest component of production, was revised slightly up in 2013, 2014 and 2015 while mining & quarrying also now shows slightly stronger recovery in the last 3 years. In contrast, the annual growth of water & waste management was revised down in 2014 and 2015.