Gross Domestic Product shrinks by 0.3% in 2012 Quarter 4

Key points

• GDP was estimated to have decreased by 0.3% in Q4 2012 compared with Q3 2012.
• Output of the production industries was estimated to have decreased by 1.8% in Q4 2012 compared with Q3 2012, following an increase of 0.7% between Q2 2012 and Q3 2012.
• Construction sector output was estimated to have increased by 0.3% in Q4 2012 compared with Q3 2012, following a decrease of 2.5% between Q2 2012 and Q3 2012.
• Output of the service industries was estimated to have been flat in Q4 2012 compared with Q3 2012, following an increase of 1.2% between Q2 2012 and Q3 2012.
• GDP was estimated to have been flat in Q4 2012, when compared with Q4 2011.
• GDP is estimated to have been flat between 2011 and 2012. Users are, however, reminded that this figure is subject to revision in the second estimate of GDP when all quarters of 2012 are open for revision.

Key figures

Gross Domestic Product (GDP) is one of the main indicators of economic growth. Further information on GDP can be found at paragraph 2 in the background notes. Unless otherwise stated, all data in this bulletin are seasonally adjusted and have had the effect of price changes removed (i.e. the data are deflated). Further information on some of the key concepts (including seasonal adjustment and deflation) underlying the estimates can be found at paragraph 4 in the background notes.

GDP in the UK grew steadily from 2000 until early-2008 when a financial market shock affected UK and global economic growth. Up until that point, services in the UK had continued to grow steadily, while production output had been broadly flat across the same period. UK construction activity grew strongly at the start of the period before a slight fall in 2005 and 2006. Construction activity then recovered so that it was around 20% higher at the end of 2007 compared with the start of 2001. The deterioration in economic conditions during 2008 had a large effect on the construction and production sectors, but the effect on the service sector was less pronounced.

Coming out of the recession in 2008-09, the rate of GDP growth has been slower compared with the early-2000s, owing to weaknesses in the domestic and global markets. Services have continued to grow steadily from 2009, and are now returning to levels seen at the start of 2008.

Production began to decrease from the start of 2011 following a mild recovery in 2010, as increased inflation and slower wage growth began to reduce households’ real income, and the developing euro area sovereign debt crisis affected business sentiment in the key EU export market for the UK. Construction activity saw a more marked increase than that of production in 2010. However, this was not sustained with activity falling from the final quarter of 2011 due to on-going financial market strains and a deteriorating economic outlook.

Users are reminded that GDP and all of its components are currently referred to 2009, making the average index in 2009=100. It is for this reason the figure above shows all components converging in 2009.

Table 1: Gross Domestic Product Preliminary Estimate key figures

Table source: Office for National Statistics

Supplementary analysis

The preliminary estimate of GDP focuses on the growth in output between two consecutive quarters (in this release Q3 and Q4 2012). GDP was estimated to have decreased by 0.3% in the fourth quarter of 2012. The largest contribution to the decrease came from the production sector (as seen in figure 2). A small downward contribution from the services sector was partially offset by a small upward contribution from the construction sector.

The production sector was estimated to have decreased by 1.8% in 2012 Q4, following an increase of 0.7% in the previous quarter. Both mining & quarrying and manufacturing made similar large negative contributions to the quarter on quarter growth rate falling by 10.2% and 1.5% respectively. The decline in mining & quarrying was due in part to an extended and later than usual maintenance period at the UK’s largest North Sea oil field, which reduced oil & gas extraction in 2012 Q4. Manufacturing weakness in Q4 was widespread with the majority of industries showing a decline in comparison with 2012 Q3.

The impact of the decline in mining & quarrying can be seen clearly, if oil & gas extraction is excluded, GDP then falls by 0.1% between 2012 Q3 and 2012 Q4 compared with the fall of 0.3% in total GDP.

The service sector was estimated to be flat in 2012 Q4, although it did make a small downwards contribution to GDP (see figure 2). This followed growth of 1.2% in 2012 Q3. The level of the service sector in 2012 Q3 was boosted by the Olympics and Paralympics (the Games). Some evidence of ‘fall-back’ following this one-off event can be seen in the following industries:

• Sports activities, amusement and recreation
• Accommodation services
• Food and beverages services
• Land Transport

Further details on the growth rates and contributions to GDP from these and other industries are included in the Sector Analysis section and in the article ‘Understanding and Interpreting the Quarter Four 2012 Gross Domestic Preliminary Estimate’.

It is not possible to quantify the overall impact of the Games and indeed some of the activity may have displaced other activity. Retrospective analysis will be carried out, in line with the ONS special events policy, when data for later periods are available.

The effect to levels in 2012 Q3 therefore had an impact on 2012 Q4 service sector growth. The largest impact was in Sports activities, amusement and recreation which fell by 22.5% and contributed 0.2 percentage points to the fall in GDP quarterly growth. The fall was mainly but not exclusively, a result of the increased output in 2012 Q3 from the ticket sales for the Games.

Sector analysis

Index of production

The index of production was estimated to have decreased by 1.8% in 2012 Q4, following an increase of 0.7% in the previous quarter. Mining and quarrying contributed the most to the decrease, followed by manufacturing. Between 2011 Q4 and 2012 Q4 production output decreased by 2.4%.

Construction

The index of construction output was estimated to have increased by 0.3% in 2012 Q4, following a decrease of 2.5% in the previous quarter. Construction output decreased by 11.0% between 2011 Q4 and 2012 Q4.

Distribution, hotels & restaurants

The index for distribution, hotels & restaurants was estimated to have decreased by 0.4% in Q4 2012, following an increase of 1.9% in the previous quarter. The largest contributions to the decrease were from retail, accommodation and food & beverage services. Accommodation services and food & beverages services both fell back after growth in 2012 Q3 due in part to the Olympics and Paralympics (the Games). Distribution, hotels & restaurants increased by 1.7 % between Q4 2011 and Q4 2012.

Transport, storage & communication

The index for transport, storage & communication was estimated to have increased by 0.7% in 2012 Q4, following an increase of 0.2% in the previous quarter. Motion picture, video & TV and programming & broadcasting made the largest contributions to the increase. Motion picture, video & TV fell by 7.7% in 2012 Q3, with some feedback from survey respondents that the fall was due to reduced demand as people chose to watch the Games rather than films or DVDs. Transport, storage & communication increased by 0.4% between 2011 Q4 and 2012 Q4.

Business services & finance

The index for business services & finance was estimated to have increased by 0.4% in 2012 Q4, following an increase of 0.9% in the previous quarter. Employment activities made the largest positive contribution to the increase. Employment activities also had growth in 2012 Q3 and although it was possible some of this strength was related to the Games, we had no direct feedback from survey respondents to support this. Business services & finance increased by 1.2% between 2011 Q4 and 2012 Q4.

Government & other services

The index for government & other services was estimated to have decreased by 0.7% in 2012 Q4, following an increase of 1.6% in the previous quarter. Sports activities, amusement and recreation activities made the largest contribution to the decrease, with a fall off the high in 2012 Q3 caused by Olympic ticket sales. Government & other services increased by 1.9% between 2011 Q4 and 2012 Q4.

Growth and contributions to growth – output components

Table 2: Growth, quarter-on-quarter percentage, for the output components of GDP

Table source: Office for National Statistics

Table notes:

1. Components may not sum to totals due to rounding

Table 3: Contributions to growth, quarter-on-quarter, for the output components of GDP

Table source: Office for National Statistics

Table notes:

1. Components may not sum to totals due to rounding

Table 4: Growth, year on year percentage, for the output components of GDP

Table source: Office for National Statistics