1. Improvements to the Output Approach to GDP (GDPO) Denise Blackmore, Mark Stephens & Claire Dobbins ONS June 2014 1

2. Agenda Background Update on current work programme Questions/comments Industry review consultation Questions/comments Looking forward 2

3. The GDPO Improvement Project The GDPO Improvement Project covers work on industry reviews and wider continual improvement issues, producing an annual report. It is delivered by the Analysis and Methods branch within Business Indicators and Balance of Payments division, ONS. There is increasing Eurostat focus on ‘index of services’ and an expectation that Member States give this more emphasis. Only Ireland, Sweden and UK currently produce a monthly index of services within the EU. 3

4. Recent improvements At Blue Book 2013 (BB13) – method / data improvements for ten Standard Industrial Classification (SIC) 2007 industries covering 10% of the economy including: Agriculture (industry 01) – Rebasing, inclusion of oilseed rape as an indicator, review of work in progress methodology Fishing (03) – Rebasing Mining support services (09) – Move from exploration volume to workforce jobs to better represent maintenance and decommissioning Iron and steel (24.1-3) – Rebasing Construction (41-43) – Move from fixed base constant price estimates to chained volume measures; move from quarterly to monthly seasonal adjustment Air transport (51) – Improved treatment of births and deaths from civil aviation authority dataset 4

5. Rebasing work for Blue Book 2014 A key delivery of continual improvement for Blue Book 2014 will be the use of Producer Price Indices (PPI), Import Price Indices (IPI), Export Price Indices (EPI) and Service Producer Price Indices (SPPI) rebased from 2005=100 to 2010=100. An article will be published on June 30 th to explain this in more detail. These are applied across the 112 industries and products used for supply and use balancing. Below this level, ONS has also updated aggregation and deflation weights where appropriate within the GDPO system e.g. Weighting output indices for management consultants (turnover based) and head offices (jobs based). Weighting the Consumer Prices Index for hotels and the Service Producer Price Index (business to business) for hotels. 5

6. Outline of GDPO deflation sources The following is an indication for users of the deflator sources used for 2010 within GDPO for Blue Book 2013. The September GDPO Improvement Report will supply a full update. SourceWeightDescription PPI/EPI12.0%Harmonic Producer Price Index and Export Price Index PPI4.3%Producer Price Index SPPI11.2%Service Producer Price Index CPI12.1%Consumer Prices Index RSI5.7%Retail Sales Index implied deflator BIS6.4%Construction Price Indices (Business, Innovation & Skills) AWE11.1%Average Weekly Earnings (labour input) HHFCE9.4%Household Final Consumption deflator Other8.9% Derived18.8%Derived from current price and volume data with 3.0% in the market sector and 15.8% in the non-market sector 6

7. Price and volume ratings The conceptual appropriateness of prices and other data are a key feature of the GDPO Improvement project. The Eurostat ‘Price and Volume Inventory’ (2014 edition) is the guidebook used to judge the quality of indicators as: A – appropriate B – acceptable C – improvement required For example, this guides ONS in seeking to use turnover data in market settings in preference to labour inputs (jobs data). 7

8. Expansion of The Monthly Business Survey Monthly Business Survey (MBS) expanded to five SIC 2007 industries: These mainly replace quarterly ONS employment indicators. MBS coverage increased from 41% to 43% of GDPO (2010 GVA weights). All five industries previously classified as ‘C’ quality due to using labour inputs. With current price data replacing employment data, each will improve to ‘B’ or ‘A’ rated industries when formally reviewed in September. ‘C’ industries fall from 19 to 14, and from 21.5% to 19.2%. IndustryDescription2010 Gross Value Added (GVA) weight, ppt 68.3Real estate agents4.4 75Vets1.3 86mMarket sector health12.8 91mMarket sector culture1.6 93mMarket sector sport4.0 8

9. VAT feasibility study We are now able to record Monthly VAT Turnover data on a SIC07 basis. Aim is to investigate using the data either as a benchmark, an indicator in its own right or as a source to augment the MBS in the long-term. It has significant potential. Currently conducting parallel runs with MBS. Update on progress in September report, but significant testing and development required. For 2013 q4, initial analysis is indicating that around 50%, 75% and 90% of turnover would have been available for the preliminary estimate, the second estimate and quarterly NA respectively. 9

10. There are 17 industries that are experimental, covering 19.8% of the economy at 2010 weights. Nine industries are currently subject to an industry review. Their status will be addressed as part of that process by spring 2016 – water transport (50), financial services (64), financial intermediation (66), real estate – fee or contract basis (68.3), scientific research & development (72), vets (75), market sector health (86m), residential care activities (87) and social work activities without accommodation (88). The methodology and data sources of the remaining industries are already of an acceptable standard. Consultation will begin in September on their re-classification as National Statistics – programming & broadcasting activities (60), computer programming (62), information services (63), insurance & pension funding (65), rental & leasing activities (77), services to building & landscaping activities (81), membership organisations (94) and households as employers of domestic personnel (97). Experimental Industries 10

11. Impact of current work on Blue Book 2014 Price rebasing – Impact on all periods MBS expansion – From 2011 only VAT feasibility study – None Experimental status – None 11

12. Questions? 12

13. What is the industry review process? The process is to: evaluate concepts and methods against international guidelines (primarily Eurostat Price and Volume Inventory, 2014) quality assure current data and methods investigate alternative sources and methods 13

14. Prioritising reviews Use a priority matrix, primarily driven by Gross Value Added weight within GDPO. This is then influenced by: Eurostat quality rating (60%) Industry specific knowledge (20%) e.g. specific data quality, periodicity and experimental status Revisions (10%) Volatility (10%) 14

15. Priority List at Blue Book 2013 64 Financial service activities 68.1/2 Real estate and imputed rent 62 Computer programming 84 Public Administration 66 Activities auxiliary to financial services 70 Activities of head offices; management consultants 71 Architectural & engineering activities; technical testing & analysis 86m Human health (market sector) 85m Education (market sector) 86nm Human health (non-market) 87 Residential care 47 Retail trade 88 Social work (non-residential) 85nm Education (non-market sector) 69 Legal and accounting activities Bold = currently under reviewUnderline = to be reviewed 15

16. Timeline Industry GDP weight (1000) CommenceConsultFinalise 68 – Real estate96.9Dec 2012Jun 2014Sep 2014 41.1 – Property developers 9.7Jun 2013TbcApr 2015 86 – Health55.2Dec 2012Jun 2014Sep 2014 64 & 66 – Financial industries 79.5Feb 2013Mar 2015Sep 2015 84 – Public admin53.5May 2013Jun 2014Sep 2014 50 – Water transport3.0Apr 2014Dec 2014Apr 2015 87/88 – Social care20.5Jun 2014Dec 2014Apr 2015 69-75 – Professional services 68.6Jun 2014Mar 2015Jul 2015 Total386.8 16

17. Questions? 17

18. Real estate – Blue Book 2013 data sources IndustryDescription Current Price VolumeDeflator 68.1Buying and selling real estate n/a 68.1-2 ComCommercial rentalsNon-ONS survey DerivedNon-ONS survey 68.1-2 Res (non-market) Residential rental e.g. council housing Government data Derived 68.1-2 Res (market) Residential rental e.g. private rented DerivedHousing stock ONS survey 68.2 ImputedAs above 68.3Agents on a fee or contract basis DerivedJobsCPI/SPPI 18

19. Industry Review – Real estate (68) Buying and selling of own real estate (68.1) Covers 1-2% of industry 68 Method using administrative data to be developed Commercial sector property rentals (part of 68.1-2) Investment Property Databank (IPD) currently provide a property rental deflator which is also used by SPPI. Develop commercial property price indices following guidance from Eurostat by the end of 2015. 19

20. Industry Review – Real estate (68) Residential sector property rentals (part of 68.1-2 and 68.2 imputed rentals) At BB13 derived from actual rentals (e.g. council rentals) and estimated rentals from stock of housing and rental price data from the ONS Living Cost and Food (LCF) Survey - estimates coherent with GDPE. Long-term aim to move from LCF to rental price data from Valuation Office Agency (VOA) which is already used within the Consumer Prices Index (Housing) or CPIH. In February 2014 ONS announced that CPIH growth rates would slowly be introduced to Household Final Consumption Expenditure and feed through to GDPO: February 2014 – Impact from 2013 March 2014 – Impact from 2012 Blue Book 2014 – Impact from 2010 Blue Book 2015 – Impact from 1997 20

21. Industry Review – Real estate (68) Real estate activities on a fee or contract basis (68.3) Move from workforce jobs to new MBS data source for Blue Book 2014 Impact on Blue Book 2014 68.1-2 – New residential sector rentals from 2010 68.3 – New MBS data from 2011 21

22. Questions? 22

23. Health – Blue Book 2013 data sources IndustryDescription Current Price VolumeDeflator 86NMNon-market human health activities Government spend Cost- weighted activity index Derived 86M.01Market subcontracted human health activities DerivedCost- weighted activity index Consumer Prices Index for Health 86M.02Market private human health activities DerivedJobsConsumer Prices Index for Health 23

24. Industry Review – Health (86) Non-market health output Good coherence between GDPE and GDPO Non-market health output index is appropriate Non-market clinical care sub-contracted to the market sector reclassified from market to non-market sector Increases weight of non-market sector Consequential change to deflation – using the non-market health output index rather than CPI for health Government funding to local authorities to be reviewed as part of social care industry review 24

25. Industry Review – Health (86) Market health output Market sector health indicator changes from workforce jobs to MBS Impact on Blue Book 2014 86M – New Monthly Business Survey data from 2011 86NM – Increase in non-market weight in all periods with consequential use of non-market health output index rather than CPI for health 25

26. Questions? 26

27. Public Admin – Blue Book 2013 data sources IndustryDescription Current Price VolumeDeflator 84.1-21Admin. of state Government spend JobsDerived 84.22DefenceGovernment spend JobsDerived 84.23JusticeGovernment spend Cost-weighted activity index Derived 84.24Public OrderGovernment spend JobsDerived 84.25FireGovernment spend Cost-weighted activity index Derived 84.3Social Security Government spend Cost-weighted activity index Derived 27

28. Industry Review – Public Admin. (84) Good coherence between GDPE and GDPO Use of employment indicators for administration of the state, defence and public order are appropriate Use of public sector output volume indices for justice, fire and social security administration are appropriate Impact on Blue Book 2014 – None Volume indices can be improved over medium-term Coverage – e.g. courts to cover Scotland, prisons to cover Northern Ireland Timeliness – Fire data is annual 28

29. Questions? 29

30. Looking forward Next suite of National Accounts articles to be published on June 30 th with an overarching article describing impacts This includes articles on price rebasing and industry reviews Industry Review article More detail on three industry reviews outlined today More detail on MBS expansion GDPO Improvement Report September 30 th Update on progress and work plans for the year ahead Update the priority matrix Extension of industry review timetable to detail new reviews to 2017 30

31. E-mail: ios.quality@ons.gsi.gov.uk denise.blackmore@ons.gsi.gov.uk mark.stephens@ons.gsi.gov.uk claire.dobbins@ons.gsi.gov.uk 31