Output in the Construction Industry: October 2015 and New Orders Quarter 3 (July to Sept) 2015

• In October 2015, output in the construction industry increased by 0.2% compared with September 2015. All new work increased by 1.2% while all repair and maintenance decreased by 1.5%.

• Within all new work, there were increases in private commercial (4.1%) and private new housing (2.3%) while public new housing, private industrial, public other new work and infrastructure reported decreases of 2.8%, 1.6%,1.2% and 1.1% respectively. Within the repair and maintenance (R&M) category, there were falls in all work types, housing repair and maintenance decreasing by 2.4% and non-housing repair and maintenance decreasing by 0.6%.

• Compared with October 2014, output in the construction industry increased by 1.0%. All new work increased by 4.2% while there was a fall of 4.2% in repair and maintenance.

• The second estimate of gross domestic product (GDP) for Quarter 3 (July to Sept) 2015 published on 27 November 2015 included an estimate of construction which showed a decrease in output of 2.2% in Quarter 3 (July to Sept) 2015. This estimate has been revised upwards by 0.3 percentage points to a fall of 1.9% in this release, this has no impact on GDP to 1 decimal place. More information on revisions are included in the Background notes section of this bulletin.

• New orders for the construction industry in Quarter 3 (July to Sept) 2015 were estimated to have increased by 0.8% compared with Quarter 2 (Apr to June) 2015 and showed no growth compared with Quarter 3 (July to Sept) 2014. There were increases in public other new work (10.8%), private commercial (4.1%) and all other work (2.7%) in Quarter 3 (July to Sept) 2015.

Output is defined as the amount charged by construction companies to customers for the value of work (produced during the reporting period) excluding VAT and payments to sub-contractors.

Construction output estimates are a short-term indicator of construction output by private sector and public corporations within Great Britain. Output estimates are produced and published at current prices (including inflationary price effects) and at chained volume estimates (with inflationary effects removed) both seasonally adjusted and non-seasonally adjusted.

Chained volume measures are also described as volume. Construction output is used in the compilation of the output approach to measuring gross domestic product (GDP).

Detailed estimates along with a longer run of time series data are available to download in the Output in the Construction Industry, October 2015 reference tables. In these tables, users will find chained volume estimates back to Quarter 1 (Jan to Mar) 1997 and monthly estimates back to January 2010. Current price non-seasonally adjusted data are available back to Quarter 1 (Jan to Mar) 1955. More information on these statistics can be found in the “definitions and explanations (39 Kb Word document)” section in the background notes.

The data published in this release cover construction estimates for Great Britain. Construction output estimates for Northern Ireland can be obtained from the Central Survey Unit.

As part of the process for re-designating construction statistics as National Statistics, an investigation of the sampling methods used during the production of the figures has shown that the parameters used in the treatment of outliers has resulted in more outliers being detected in the first quarter than at any other point. In reviewing this we have found that this outlier treatment can be improved. This has led to revisions in the data. A review of the seasonal adjustment parameters used in the compilation of output in the construction industry has also led to revisions in the data. More information on revisions and the impact on gross domestic product (GDP) are included in the Background notes section of this bulletin.

National Statistics status

On 11 December 2014, the UK Statistics Authority announced its decision to suspend designation of Construction Price and Cost Indices due to concerns about the quality of these deflators. As a result the UK Statistics Authority announced its decision to suspend the Output and New Orders as National Statistics in respect of the Code of Practice for Official Statistics.

We took responsibility for the publication of the Construction Price and Cost Indices from the Department of Business Innovation and Skills (BIS) on 1 April 2015. Since this point we have worked towards creating an interim solution to measure output prices and replace the statistical models that had been used in the production of chained volume measures (CVMs) for output in the construction industry since Quarter 3 (July to Sept) 2014 and to provide an ongoing source of data from Quarter 1 (Jan to Mar) 2014 onwards. This interim solution was included in the data published in June 2015 for all periods from January 2014 onwards.

A work plan (104.4 Kb Pdf) for the development of construction price statistics has today been published on our website (Guidance and methods page) and provides information on both our research into nominal data as well as construction price statistics.

All work

In October 2015 all work:

• increased by 0.2% compared with September 2015

• increased by 1.0% compared with October 2014

Figure 1 shows the 2 main components of all work. The chart shows that since the series began in January 2010 the monthly path has been volatile. The early period shows that after a rise in output in early 2010, the level remained fairly consistent until late 2011 when output started to fall. Output increased steadily in 2013 and 2014 with all new work and repair and maintenance performing at a similar level, however, in late 2014 the 2 components started to move in opposite directions with all new work outperforming repair and maintenance.

Figure 2 looks at the main components of all new work. There was sustained growth in all new housing from early 2013 until late 2014 and after several months of contraction in early 2015 there was a return to growth in September and October 2015. After growth in infrastructure from late 2014 there have been 3 consecutive months of falls from August 2015 to October 2015. Other new work remained fairly flat and after 3 months of contraction between July 2015 and September 2015 there was a return to growth in October 2015.

Figure 3 looks at the 2 main components of repair and maintenance. The level of housing and non-housing repair and maintenance has been fairly consistent since the start of the time series. After increases in housing and non-housing repair and maintenance in September 2015 there were falls in both components in October 2015. The chart shows that non-housing repair and maintenance has been gradually falling since the start of 2015.

Summary of growth rates for all work types

Table 1 provides a summary of growth rates across the different types of construction work in October 2015. Some main points from this table are as follows:

• all work increased in October 2015 compared with September 2015 due to an increase in all new work

• the month-on-month increase in all new work was due to increases in private new housing and private commercial work

• all components of repair and maintenance showed a decrease in October 2015 compared with September 2015

• the year-on-year increase in all work was due to all new work; there were increases in private new housing, infrastructure, private industrial and private commercial work

Figure 4 shows the contribution of each sector to output growth in the construction industry between October 2015 and September 2015.

In October 2015, 2 of the main construction sectors saw an increase in output growth. The largest contribution came from private commercial work.

Output in the construction industry estimates are produced from the monthly business survey on the second Friday of the month, 2 months after the reporting month. Revised results, for previously published periods, are published in line with the national accounts revisions policy. More information about the data content for this release can be found in the background notes.

Revisions are an inevitable consequence of the trade-off between timeliness and accuracy. The response rate in October 2015 was 72.1% of questionnaires, accounting for 76.0% of registered turnover in the construction industry. Therefore the estimate is subject to revisions as more data become available.

The monthly output in the construction industry time series now spans 70 months, however, users should note that this is the minimum time span recommended by Eurostat for seasonal adjustment. While the seasonal pattern is generally established after 60 months in a monthly time series, there is still potential for increased revisions until the seasonal pattern has matured.

All estimates, by definition, are subject to statistical uncertainty and for many well-established statistics, we measure and publish the sampling error associated with the estimate, using this as an indicator of accuracy. For construction output we publish sample and non-sample errors in Table 11 of the main reference tables. It should be noted that we are continually working on methodological changes to improve the accuracy of the construction output estimates, progress on these can be found on the ONS continuous improvement page on our website.

Construction estimates are a main component of the output approach to measuring GDP, along with the estimates of services, production and agriculture. As an aid to users, the short-term economic indicator releases that directly feed into GDP include an additional table of the GDP components. This table should help to inform users of the relationship between the individual components which comprise GDP output. The publication dates and the quarterly growths of the individual GDP components are shown below.

Each component of GDP has a weight within GDP based on its value in 2012. Construction has a weight of 59, which means that it is 59 parts of the 1,000 that make up total GDP.

To determine the effect each component has on GDP multiply the component growth by its weight in GDP.

An example using Quarter 2 (Apr to June) 2015 data:
Construction growth = 1.4
Weight in GDP = 0.059 (59/1000)
Effect on GDP = 1.4 * 0.059 = 0.08 or 0.1 to 1 decimal place (dp)
Revisions to components and the effect on GDP can be calculated using the same process. As a general rule there are no revisions to GDP when the component revisions are:

Index of Production (IoP) = between 0.3 and -0.3
Construction = between 0.9 and -0.9
Index of Services (IoS) = 0.0 (all values above or below 0.0 effect GDP due to the high weight of IoS in GDP)

Because;

IoP = 0.148*0.4 = 0.0592 or 0.1 to 1 dp
Construction = 0.059*0.9 = 0.0531 or 0.1 to 1 dp
IoS = 0.786*0.1 = 0.0786 or 0.1 to 1 dp

Table 2 shows the latest monthly and revised quarterly output figures that fed into the second estimate of GDP for Quarter 3 (July to Sept) 2015 published on 27 November 2015.

The second estimate of GDP published on 27 November 2015 contained an estimate for quarterly construction of a decrease of 2.2%. This estimate has been revised within this release based upon updated survey responses and is now estimated to be a fall of 1.9%. This revision of 0.3 percentage points does not revise the growth rate of GDP.

Investigation of the sampling methods used during the production of the figures for the output in the construction industry release has shown that the parameters used in the treatment of outliers has resulted in more outliers being detected in the first quarter than at any other point. In reviewing this we found that this outlier treatment can be improved which leads to revisions across these 4 months. Estimates in this month’s release have also incorporated the results of a seasonal adjustment review which has also contributed to revisions in the data. More information on these revisions and the impact on GDP are included in the Background notes section of this bulletin.

It is estimated that the seasonally adjusted volume of all new orders increased by 0.8% between Quarter 2 (Apr to June) 2015 and Quarter 3 (July to Sept) 2015, to £12.6 billion. There were increases in the volume of new orders for public other new work and private commercial work while all other work types showed decreases.

The volume of new orders in new housing decreased by 4.0% between Quarter 2 (Apr to June) 2015 and Quarter 3 (July to Sept) 2015, with both public and private new housing decreasing, by 16.4% and 2.7% respectively. It should be noted that the weight of public new housing is small at only 8% of total new housing.

The volume of new orders in infrastructure decreased by 1.1% in Quarter 3 (July to Sept) 2015 compared with Quarter 2 (Apr to June) 2015, to a level of £3.1 billion. Comparing Quarter 3 (July to Sept) 2015 with the same period a year ago, infrastructure increased by 63.2%. This is a particularly volatile series due to the range of products such as electricity, gas, road, rail etc included within this type of work, therefore movements of this magnitude are not unusual.

The volume of all new orders in Quarter 3 (July to Sept) 2015 showed no growth compared with the same period a year ago. There were increases in infrastructure and private industrial work which were offset by decreases in total new housing, public other new work and private commercial work.

Users should note that there is a time lag between how long an order turns into output (if at all) and therefore an assumption that improved new orders data will result in an improved output picture is a difficult assumption to make.

Further users should note that there may be some discontinuity in the data around Quarter 3 (July to Sept) 2013 where the Barbour ABI data were used for the first time to compile these statistics.

In October 2015, construction output grew by 0.2% compared with the previous month and by 1.0% over the year, ending the general downward trend in the annual growth series that began around the start of 2015. However, comparing the 3 months (Aug to Oct) with the preceding 3 months (May to July), output declined by 2.0%.

The monthly growth in construction output was driven by higher new work in the private sector, both housing (1.5%) and commercial (4.1%), while repair and maintenance contracted by 1.5%. Although positive, the annual rate of growth in private housing has seen a gradual decline since late 2014.

The Bank of England’s Agents’ Summary of Business Conditions for October has recently cited strong competition among mortgage lenders, an important indicator for household demand for housing. The report mentions that this has coincided with a supply response: an increase in the construction output of new housing. The Bank of England’s Inflation Report for November 2015 mentions that lower mortgage interest rates were a driving factor behind the change in housing demand – with rising mortgage approvals for both house purchase and re mortgaging, and hence increased net mortgage lending in September. This is reflected in house price inflation, with the ONS House Price Index stating that house prices increased by 6.1% in the year to September 2015, up from 5.5% in the year to August 2015.

Infrastructure work continues to show good growth, rising by 23.2% in October 2015 compared with a year earlier, although this was growth at a lower rate from April 2015’s record high of 41.6%. Infrastructure construction output has declined on average by 1.3% per month since April; aligning with the Agents’ summary which mentions reports of an easing in the pace of expansion of commercial development and infrastructure activity in October.

One area of particular note has been infrastructure spending in electricity works, which has seen a rapid increase in prices in recent years. Since 2009, the value of electricity works has increased by 760%, which is reflected in the infrastructure figures. Regionally, the value of infrastructure in London has declined by 42% since Quarter 4 (Oct to Dec) 2011, but this is being offset by growth in other areas in the UK – the biggest regional contributors were Scotland, which has seen a 287% increase in works value since 2012, and the East of England, with value increasing by 225% since 2008. Other regions are also seeing significant increases, such as the North East, with the value of infrastructure work increasing by 630% since 2008, indicating a steady build up in the area. On the other hand, water-related works have declined by 70% since 2011, while the construction of railways has also contracted – by approximately 47% since the end of 2012.

Output in the construction industry follows the Eurostat Short Term Statistics (STS) regulation for production in construction. Before any comparisons are made with the euro area or EU28, it is worth noting that the UK is the only member state to follow the A method for compiling production in construction statistics.

The latest release of production in construction showed that construction output in the euro area (EA19) decreased by 0.4% in September 2015 and remained stable in the EU28 compared with August 2015. The Great Britain estimate for September 2015 showed that construction output remained flat. It should be noted that an accurate comparison cannot be made as Eurostat data are calculated on a 2010 = 100 basis, while Great Britain data are calculated on a 2012 = 100 basis.

Outside of the EU, the US Census Bureau release Value of construction put in place published on 1 December 2015, showed provisional estimates of construction output increased by 1.0% in October 2015 compared with September 2015 and increased by 13.0% compared with October 2014.

International comparisons

International construction comparisons are compiled by Eurostat. The estimates produced in this bulletin are included in these comparisons. Further information can be found on the Eurostat web page.