Index of Services, UK: December 2015

The Index of Services is estimated to have increased by 2.1% in December 2015 compared with December 2014. All of the 4 main components of the services industries increased in the most recent month compared with the same month a year ago.

The largest contribution to total growth came from: distribution, hotels and restaurants, and business services and finance, which both contributed 0.7 percentage points to total growth.

The latest Index of Services estimates show that output increased by 0.2% between November 2015 and December 2015. This follows growth of 0.3% between October 2015 and November 2015, which is revised up 0.1% from the previous estimate.

The Index of Services increased by 0.7% in Quarter 4 (Oct to Dec) 2015 compared with Quarter 3 (July to Sept) 2015. This figure was unrevised from the estimate used in the Gross Domestic Product (GDP) Preliminary Estimate, published on 28 January 2016 and is consistent with the Second Estimate of GDP, published on 25 February 2016.

The Index of Services is estimated to have increased by 2.5% in 2015 compared with 2014. This follows 3.3% growth in 2014 compared with 2013.

The figures within this release are estimates and are on a seasonally adjusted basis. The earliest period open for revision in this release is January 2015.

About the IoS

The monthly IoS provides a timely indicator of growth in the output of the services industries. The IoS is an important economic indicator and shares exactly the same industry coverage as the corresponding quarterly series within UK gross domestic product (GDP). The primary purpose of the IoS is to produce a short-term measure of the output of the services industries within the UK economy and show the monthly movements in the gross value added (GVA) of the services industries (2007 Standard Industrial Classification (SIC 2007) sections G to T).

The 4 main components of the services industries are:

• distribution, hotels and restaurants

• transport, storage and communications

• business services and finance

• government and other services

The IoS is the largest contributor to the output approach to the measurement of GDP, accounting for 78.6% of UK GDP in 2012.

All data in this bulletin are seasonally adjusted estimates and have had the effect of price changes removed (in other words, the data are deflated). Further information on some of the main concepts (including seasonal adjustment and deflation) underlying the estimates can be found in background note 11.

The quality of the IoS

The IoS is published around 8 weeks after the end of the reference month. There is no simple way of measuring the accuracy of the IoS, that is, the extent to which the estimate measures the underlying “true” value of the output growth (of the services industries) in the UK for a particular period. All estimates, by definition, are subject to statistical uncertainty and for many well-established statistics the Office for National Statistics (ONS) measures and publishes the sampling error associated with the estimate, using this as an indicator of accuracy. However, as IoS is constructed from a wide variety of data sources, some of which are not based on random samples, we don’t publish a measure of the sampling error associated with the IoS.

Reliability is one dimension of measuring accuracy, 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 IoS are typically small (around 0.1 to 0.2 percentage points), with the frequency of upward and downward revisions broadly equal. More information on the most recent revisions analysis can be found in the component analysis section and in background note 17.

It should be noted that care should be taken when using the month-on-month growth rates, due to their volatility (background note 10).

Further information on the quality of the IoS is available in the Quality of the IoS report on the Index of Services Methods page on our website. It should be noted that as part of the IoS industry review process, we are continually working on methodological changes to improve the accuracy of the IoS.

The Index of Services (IoS) measures the quantity of output from all UK services industries, which account for more than three-quarters of the output approach to the measurement of GDP. Index values are currently referenced to 2012 so that the average for 2012 is equal to 100. Therefore, an index value of 110 would indicate that output is 10% higher than the average for 2012.

As seen in Figure 1, the IoS increased by 2.1% in December 2015 compared with December 2014. In order of their contribution to growth (listed in table IOS1 in the Index of Services publication tables dataset):

1. distribution, hotels and restaurants increased by 3.8%

2. business services and finance increased by 1.7%

3. transport, storage and communications increased by 3.7%

4. government and other services increased by 0.8%

Further detail on these movements can be found in the component analysis section.

Between November 2015 and December 2015, as seen in Figure 2, IoS output increased by 0.2%.

Out of the 4 main components of the services industries, 3 increased in the most recent month compared with the previous month. In order of their contribution to growth (listed in table IOS1 in the Index of Services publication tables dataset):

1. business services and finance increased by 0.3%

2. government and other services increased by 0.4%

3. transport, storage and communication increased by 0.2%

In contrast, distribution, hotels and restaurants decreased by 0.1%.

More detail on individual components can be found in the Index of Services publication tables dataset. The tables also provide information on the growth for the 3 months ending in December 2015 compared with the previous 3 months and compared with the 3 months ending December 2014.

Total services grew by 2.2% between Quarter 4 (Oct to Dec) 2014 and Quarter 4 (Oct to Dec) 2015 and by 0.7% between Quarter 3 (July to Sept) 2015 and Quarter 4 (Oct to Dec) 2015. This compares with growth rates of 1.9% and 0.5% respectively for the economy as a whole.

Since 1997, the services industries as a whole have grown at a faster rate than all other headline industries. While GDP has grown at a compound average (further information on compound average growth can be found in background note 11) growth rate of 2.0% per year between 1998 and 2015, services have grown at a compound average growth rate of 2.8% per year (more information can be found in Second Estimate of GDP, Quarter 4 (Oct to Dec) 2015). This has led to a continuing re-orientation of the economy towards services, despite productivity in the services industries as a whole rising more slowly than in the production industries (and manufacturing in particular) since 1997 (more information can be found in Labour Productivity, Quarter 3 (July to Sep) 2015). The higher output growth, therefore, reflects the increasing share of the labour force employed in services, which grew from 73% to 80% between 1997 and 2015 (Labour Market Statistics, February 2016).

In addition to strong long-run growth, the services industries as a whole were also less affected by the downturn (between 2007 and 2009) than other headline industries, such as production and construction, and subsequently recovered more quickly. Relatively strong growth in the services industries has provided the largest contribution to the recovery in the whole economy and has been the only headline industry grouping to have surpassed its pre-downturn peak levels (more information can be found in Second Estimate of GDP, Quarter 4 (Oct to Dec) 2015).

Even though the services industries as a whole have been performing better than all other headline industries, the growth within the services’ sub-components has been quite varied. Figure 3 shows that between 1998 and 2015, transport, storage and communications, and business services and finance grew faster than the services industries as a whole, both at compound average growth rates of 3.7% per year, while services grew at a compound average growth rate of 2.8% per year over the same period. However, government and other services, and distribution, hotels and restaurants grew at a slower rate than the services industries as a whole (at compound average growth rates of 1.6% and 1.9% per year respectively) between 1998 and 2015.

The economy’s downturn, Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2009, affected the 4 sub-components of the services industries to different degrees. Distribution, hotels and restaurants, and transport, storage and communications were affected the most, with their output falling by 9.1% and 7.5% respectively, while the output of the services industries as a whole contracted by 4.1% over the same period. Business services and finance, and government and other services were impacted less severely, with their output contracting by 3.5% and 0.1% respectively.

Business services and finance has experienced the strongest recovery following the economy’s downturn and in Quarter 4 (Oct to Dec) 2015, output was 14.9% above pre-downturn levels. The recovery of transport, storage and communications, and distribution, hotels and restaurants were also quite strong and in Quarter 4 (Oct to Dec) 2015, they were 11.7% and 11.5% above their respective values in Quarter 1 (Jan to Mar) 2008. However, the recovery of the government and other services industries was more modest and in Quarter 4 (Oct to Dec), output was 7.3% above its Quarter 1 (Jan to Mar) 2008 value.

Figure 4 shows the share of nominal (unadjusted for the affect of price changes) gross value added accounted for by services 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 gross value added (GVA) accounted for by services in the UK was just under 70%, around the middle of the range relative to the other economies shown. By 2013, the UK had become relatively more reliant on services, as its share rose to 78% of nominal GVA.

GDP impact and components

With a weight of 78.6%, the services industries are the largest industrial grouping in the output approach to measuring GDP. The releases for the short-term economic indicators that feed directly into the output approach to measuring GDP include a table detailing growth in the 4 main industrial groupings (Table 2). This will aid understanding of the relationship between the individual short-term releases and GDP output.

In Quarter 4 (Oct to Dec) 2015, GDP was estimated to have increased by 0.5% compared with the previous quarter. The contribution an industry grouping makes to the GDP quarterly growth is dependent on the quarterly change in that industry grouping and its weight within the output approach to measuring GDP.

Monthly estimates are produced for each industrial grouping except agriculture. The December 2015 estimates for production and construction were published on 10 February 2016 and 12 February 2016 respectively. The Second Estimate of Gross Domestic Product Quarter 4 (Oct to Dec) 2015 was published on 25 February 2016 alongside this bulletin.

Distribution, hotels and restaurants

The index of distribution, hotels and restaurants increased by 3.8% in December 2015 compared with December 2014, this follows an increase of 4.7% in November 2015 compared with the same month a year earlier. The main contributors to the increase were: wholesale and retail trade and repair of motor vehicles and motorcycles, which increased by 10.5% and retail trade, except of motor vehicles and motorcycles, which increased by 2.4%.

Transport, storage and communications

The index of transport, storage and communications increased by 3.7% in December 2015 compared with December 2014; this follows an increase of 4.3% in November 2015 compared with the same month a year earlier. The main contributors to the increase were: computer programming, consultancy and related activities, which increased by 7.6% and publishing audiovisual and broadcasting activities, which increased by 8.6%.

Business services and finance

The index of business services and finance increased by 1.7% in December 2015 compared with December 2014; this follows an increase of 2.0% in November 2015 compared with the same month a year earlier. The main contributors to the increase were: real estate activities, which increased by 2.7% and administration and support service activities, which increased by 4.3%.

Government and other services

The index of government and other services increased by 0.8% in December 2015 compared with December 2014; this follows an increase of 0.6% in November 2015 compared with the same month a year earlier. The main contributors to the increase were: human health and social work activities, which increased by 2.0% and education, which increased by 1.6%.

Revisions

The Index of Services (IoS) follows 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

• actual data replacing forecast data

• revisions to seasonal factors that are re-estimated every period

More information on IoS revisions is available on the Index of Services Methods page.

We produce revisions triangles of services growth to provide users with one indication of the reliability of this main indicator. Statistical tests are performed on the average revision to test if it is statistically significantly different to 0. Further information can be found in background note 17.

In this release of data, the earliest period open to revision is January 2015. Across this open period, there are minimal revisions to the month-on-a-year ago and month-on-month growth rates. In absolute terms revisions to growth are no bigger than 0.1 percentage points. The growth rate for November 2015 compared with November 2014 was revised up by 0.1 percentage points from the previous estimate of 2.3%. The month-on-month growth rate for November 2015 compared with October 2015 was revised up by 0.1 percentage points from the previous estimate of 0.2%.

Further details on the revisions to the IoS components can be found in the RIOS1 tables in the Index of Services publication tables dataset.

In 2015, IoS grew by 2.5% over the calendar year, this was lower than the 3.3% growth rate seen in 2014. However, it remained above the compound average growth rate achieved from the years 2010 to 2014 inclusive (2.3%).

All 4 headline industries in 2015 grew by

• distribution, hotels and restaurants by 4.8%

• transport, storage and communications by 4.2%

• business services and finance by 2.5%

• government and other services by 0.4%

Figure 6 plots annual growth rates of services and its headline components since 1998. Growth in the IoS appears most closely aligned with that of business services and finance (the highest weighted headline industry); the 2 series have experienced fewer fluctuations in growth in the post-downturn period. Transport, storage and communications has experienced the most volatile growth rates, with particularly strong growth in the late 1990s and into 2000 (mainly driven by a strong growth in the information and communication industries). It also experienced the largest annual contraction in 2009, but in the last 5 years growth has been relatively more modest and stable.

Government and other services was the only headline industry relatively unaffected by the downturn. However, this industry experienced lower compound average growth in the post-downturn period compared to the pre-downturn period, with particularly weak growth in 2015. Distribution, hotels and restaurants is the only headline industry to have grown at a higher compound average growth rate in the post-downturn period compared with the pre-downturn period.

Figure 7 examines the growth rates of the 4 main components of IoS, for both the latest year and the long run (from 1998 to 2014). Business services and finance, and transport, storage and communications were the fastest growing industries between 1998 and 2014, both growing at compound average growth rates of 3.7% per year. Over the same period distribution, hotels and restaurants, and government and other services grew less strongly at compound average growth rates of 1.8% and 1.7% per year, respectively. In 2015, all 4 components of IoS grew but at varying speeds. Distribution, hotels and restaurants, and transport, storage and communication grew the most in 2015, exceeding their long run compound average growth by 3.0 and 0.4 percentage points respectively. In 2015, business services and finance grew slower than its long run compound average growth rate but still achieved a robust growth. In contrast, government and other services grew at the slowest rate in 2015 (0.4%) and significantly slower than its long run compound average growth rate.

Figure 8 further breaks down distribution, hotels and restaurants into the growth of its 5 main components, for both the latest year and the long run average (from 1998 to 2014). Between 1998 and 2014 the components of this industry have grown at compound average growth rates ranging from 0.6% per year to 2.7% per year. However, in the most recent calendar year, all 5 components have grown faster than their respective long run averages and contributed to the strong growth of the industry. Notably, in 2015, accommodation grew 7.9 percentage points faster than its long run average while wholesale and retail trade and repair of motor vehicles rose 6.9 percentage points faster than its long run average.