Analysis of past revisions to UK Trade statistics David Ruffles Office for National Statistics 1 Drummond Gate London SW1V 2QQ Tel: 2 7533 664 Email: bop@ons.gov.uk Following an announcement in the March 24 edition of Economic Trends 1, ONS now regularly publishes information on revisions in the background notes of its First releases. This article on the ONS website looks at the revisions performance for UK Trade statistics and the reasons behind the significant mean or average revisions seen in the figures for Total trade. An article looking at revisions to quarterly GDP growth and its production and expenditure components 2 is already available on the ONS website and others will follow in the coming months. Introduction One indication of the reliability of the key indicators in the UK Trade First Release can be obtained by monitoring the size of revisions between first publication and estimates twelve months later. The table below records the size and pattern of revisions to total trade that have occurred over the last five years. These show that the first estimate for both exports and imports tends to understate the value twelve months later. However, there is little impact on the overall trade balance. Please note that these indicators only report summary measures for revisions. In addition, the revised data may itself, be subject to sampling or other sources of error. The table covers estimates of UK trade first published from December 1998 (for October 1998) to November 23 (for September 23). A spreadsheet giving these estimates and the calculations behind the averages in the table is available on the National Statistics website at: http://www.statistics.gov.uk/statbase/product.asp?vlnk=1119. Value in Dec 24 Revisions between first publication and estimates twelve months later Average over the last 5 Average over the last 5 years years without regard to sign (average absolute revision) million million million Total trade exports (IKBH) 2522 647* 733 Total trade imports (IKBI) 28223 76* 722 Total trade balance (IKBJ) -321-59 342 A statistical test has been applied to the average revision to find out if the mean revision is statistically significantly different from zero. An asterisk (*) indicates where the mean revision is statistically significant. Background The first step in examining the cause of these statistically significant mean revisions was to look separately at the components of total trade, that is trade in goods and trade in services. The following chart shows that, for both exports and imports, for all three components the first published estimates tend to understate the estimate twelve months later. Trade in goods The second step was to look separately at trade in goods with EU countries (in this case the EU (15)) and trade in goods with non-eu countries. The following chart shows that, for both exports and imports, it is the average revisions to trade with the EU that dominate the overall scale of the revisions.
m illio n 8 Chart 1: Average revisions to trade in goods and services over the last 5 years 7 6 5 4 3 2 1 G o o d s & S e r v i c e s G o o d s S e r v i c e s E x p o r t s Im p o r t s m illio n 5 Chart 2: Average revisions to trade in goods over the last 5 years 4 3 2 1 T o ta l g o o d s E U n o n - E U -1 E x p o r t s Im p o rt s Trade in goods with non-eu countries The size of average revisions for both exports to and imports from non-eu countries is so small that no further investigation has been undertaken into these. The size of these revisions is not a surprise given the data source. The figures for trade with non-eu countries show the trade as declared by importers and exporters, or their agents, and for which documentation has been received and processed in HM Customs & Excise (HMCE) during the month. The first step in examining the cause of these statistically significant mean revisions was to look separately at the components of total trade, that is trade in goods and trade in services. The following chart shows that, for both exports and imports, for all three components the first published estimates tend to understate the estimate twelve months later.
Importers are required to present a Customs declaration before they can obtain Customs clearance and remove the goods. Under the procedures for the control of exports the principle is the same - namely that goods cannot be cleared for export until a Customs declaration has been made. It is therefore less likely that data will be revised. The first step in examining the cause of these statistically significant mean revisions was to look separately at the components of total trade, that is trade in goods and trade in services. The following chart shows that, for both exports and imports, for all three components the first published estimates tend to understate the estimate twelve months later. Trade in goods with EU countries Trade with EU countries is reported to HMCE via a different system. The Intrastat system is linked to Value Added Tax (VAT) and has applied since 1993, with minor variations, in all EU member states. In the UK all VAT-registered businesses are required to complete two additional boxes on their VAT returns, which are normally submitted quarterly. These show the total value of exports of goods to customers in other Member States (dispatches) and the total value of imports of goods from suppliers in other Member States (arrivals). Traders whose annual value of dispatches or arrivals exceed given thresholds are required to provide a supplementary declaration each month, showing full details of their dispatches (exports) and arrivals (imports) during the month. These thresholds are reviewed annually. This is done to minimise the burden on business of the Intrastat system whilst ensuring reliable estimates through maintaining the coverage by value of UK trade required by European legislation. These detailed Intrastat declarations form the basis of the statistics for trade in goods with EU countries. Traders who have a legal responsibility to provide Intrastat declarations are required to do so by the end of the calendar month following the month to which the declaration refers. However, where traders fail to provide Intrastat returns by this deadline estimates of the total value of such trade are imputed by HMCE. These are based on the trade reported by these traders in a previous period and the growth rate since that period for traders who have provided returns for the current month. Late declarations of trade with EU countries are subsequently incorporated into the month s figures to which they relate, with a corresponding re-assessment of the initial estimates for late-response. The total values of arrivals and dispatches by VAT registered traders who are below the Intrastat thresholds are available from their VAT returns. The figures are included in data for the month in which the VAT return is received by HMCE, although the VAT return itself may relate to a period of more than one month. During the period under examination, the UK Trade First Release on 9 July 23 included revisions to imports of goods from the EU for the period since 1999 to reflect initial adjustments for the impact of VAT missing trader intra-community (MTIC) fraud. Because of the exceptional nature of this revision and its size the following chart shows the effect of removing this revision. m illio n 5 Chart 3: Average revisions to trade in goods over the last 5 y e a rs e x c lu d in g in itia l a d ju s tm e n t fo r im p a c t o f M T IC fra u d 4 3 2 1 T o ta l g o o d s E U n o n - E U - 1 E x p o r t s Im p o r t s Im p o r t s - M T IC
As Intrastat is a monthly reporting system that is prone to late response it is not unexpected that the size of the revisions would be much greater than for trade with non-eu countries. The first published estimates for trade with the EU have always included estimates for non-response and partial response in an effort to anticipate the value of late returns. Despite this the analysis still showed a tendency towards underestimation in the first estimates. Accordingly HMCE have been investigating the likely causes of these statistically significant mean revisions. The investigations In order to evaluate the quality of the value of trade declared to HMCE at the time the first estimates of trade are produced, the difference between the actual trade received (12 months after) and this provisional value was analysed using the following formula: Actual Total Trade = provisional value of declared trade + partial response estimate + late response estimate + Error in partial response + Error in late response + Residual Error Y = v +z 1 + z 2 + (x 1 - z 1 ) + (x 2 - z 2 ) + RE RE =Y - v - z 1 - z 2 - e 1 - e 2 where: Y RE v x 1 x 2 z 1 z 2 e 1 e 2 = actual total trade = Residual Error = provisional value of declared trade = actual partial response = actual late response = partial response estimate = late response estimate = actual partial response partial response estimate = actual late response late response estimate Using data covered the period March 21 to June 23, HMCE investigated the following categories: (i) (ii) (iii) Partial response trade value error Late response trade value error Residual Error This period was chosen due to the availability of historic partial response estimates. Late and partial response The current methodology for late-response compares traders who have submitted against traders who submitted declarations for the corresponding month a year ago (base month). Those traders who were present in the base month but have not yet submitted a declaration for the current month have a late response estimate calculated. These estimates are adjusted once a late declaration has been received by HMCE. New traders, who have entered the Intrastat register in recent months and are not declaring on time, would not have a late-response estimate (as they were not in the base month). The methodology assumes that the number of traders leaving the register would be approximately equal with the number of traders entering the register. However, problems can arise when traders change their VAT registration (perhaps as a result of an internal reorganisation, mergers or sales). Similarly problems can arise when a trader starts submitting returns for the first time. If he then becomes a late-responder there may be no history of previous trade upon which to base an estimate. To allow for this ONS makes an initial adjustment to both exports and imports (reducing to zero over the following 2 months).
Furthermore some traders may submit first declarations for a month that do not include all their trade in that month. Later declarations are then received for the rest of their trade. The pattern of receipt at HMCE of these partial returns is analysed to enable ONS to make initial adjustments to both exports and imports to anticipate these later declarations. These initial adjustments are reduced in subsequent months as late declarations are processed. The methodology for estimating late and partial response assumes that traders leaving the register balance new traders coming into the Intrastat system, so that using the historical data to estimate current trends are valid. However, recently there has been an increase in the proportion of new traders and an increase in the proportion of small traders. In particular a much larger than normal number of new traders entered the Intrastat register in 24, due to the lowering of the threshold for submission of detailed declarations from January 24 and EU enlargement which occurred on 1 May 24. This change in the profile of the trader register means that the original assumption is no longer valid and an additional adjustment should be made to the estimates for partial and late response. In addition, there was a noticeable impact from May 24, as a higher proportion of new Intrastat traders failed to change over to submitting Intrastat following EU enlargement. As a result it is difficult to predict the value of late declarations in 24 and the early months of 25 based on past history. Residual error The following charts show the residual error for arrivals (Chart 4) and for dispatches (Chart 5). Chart 4: The residual error for Arrivals 8 6 Value ( millions) 4 2-2 -4 Mar-1 Jun-1 Sep-1 Dec-1 Mar-2 Jun-2 Sep-2 Dec-2 Mar-3 Jun-3 Month Source: HMCE Chart 5: The residual error for Dispatches 8 7 Value ( Millions) 6 5 4 3 2 1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-2 Mar-2 May-2 Jul-2 Sep-2 Nov-2 Jan-3 Mar-3 May-3 Month Source: HMCE
The average residual error for arrivals for the period March 21 to June 23 is 2 million per month. The bulk of this residual error is due to the variability in the value of trade. There is also an effect identified from the methodology for late-response and partial response. The average residual error for the period March 21 to June 23 is around 37 million. The bulk of this residual error is due to the variability of trade. The residual error for dispatches is similar to arrivals, and fluctuates from 1 million in June 21 to 7 million in June 22. The conclusions The work highlights that two of the additional estimates that HMCE produces, namely late-response and partial response, may be under or over estimated; with an average difference of 25 million for arrivals and 85 million for dispatches per month over the period March 21 to December 23. More importantly, the research has highlighted an area of trade that the current estimates do not cover. This residual error is due to incomplete estimation of partial and late response, processing error or some methodological inaccuracy. The average residual error is approximately + 3 million. As a result of these findings, and from the first publication of September 23, ONS has agreed with HMCE to include an adjustment of 2 million in its first estimates for both exports and imports from the EU to improve the quality of these early estimates. This is a conservative adjustment designed to reduce the size of the revisions to trade in goods while HMCE undertake a full review of its estimation methodology. This review will take place during 25 now that the particular data issues in 24 have settled, i.e. the impacts from the reduction in the Intrastat Threshold in January and EU enlargement in May. In addition, HMCE will continue to provide ONS with estimates based over the latest 12 months with additional summary statistics, to enable monitoring of the situation. Trade in services The initial monthly estimates for trade in services are derived from a number of monthly, quarterly and annual sources. The only monthly data available for the first calculation are for the Travel from the International Passenger Survey (IPS). Even these data will change on a quarterly and annual basis, taking on later information. For components where no monthly data are available, estimates have been derived on the basis of recent trends. As estimation makes up the bulk of the first published estimates, sizeable average revisions are to be expected. More details of the data sources and estimation methodology were described in Economic Trends (November 1996 and September 1997). The monthly data set is constrained to the data published both quarterly and annually, so revisions result from quarterly survey results replacing the initial estimates and annual survey results which in turn replace the results from the much smaller quarterly samples. In the period under consideration, there were also specific revisions from a specific methodological improvement - the doubling in sample size of the International Trade in Service (ITIS) survey from September 21. Given these two main sources of revision to the initial dataset, the investigation of the revisions to total trade in services has been undertaken for the revisions between the first published estimates and estimates published three and twelve months later, although the latter may not cover revisions from annual inquiries for all months. These analyses showed, for both exports and imports, that roughly a third of the statistically significant mean revision shown in the first graph occurred between the first published estimate and the estimate three months later. The investigations In researching the cause of the statistically significant mean revisions to the first estimates it has been necessary to look at each of the eleven broad categories of services and the pattern of revisions between first estimates, first quarterly results and annual results. The eleven categories of services are as follows: (a) Transportation (b) Travel (c) Communication services (d) Construction services (e) Insurance services
(f) Financial services (g) Computer and information services (h) Royalties and licence fees (i) Other business services (j) Personal, cultural and recreational services and (k) Government services Unfortunately, difficulties with data availability at the detailed level mean that it has been impossible to carry out this analysis for an equivalent period to the analyses carried out above. However we have investigated such data as are available which amounted to 23 observations for the 3-month analysis and 17 observations for the 12-month analysis. The findings Looking first at the revisions made three months after first publication, for exports the components showing statistically significant mean revisions are insurance services, government services, other business services, communications services and royalties and licence fees. Of these, the largest component within total exports of services is other business services (accounting for around 3% of the total) with the remainder being much smaller components. Similarly, looking at the revisions made three months after first publication for imports of services, the components showing statistically significant mean revisions are transportation services, government services, travel and royalties and licence fees. Of these, travel is the largest component of total imports of services, representing around 4% of the total. It is somewhat surprising that the revisions to travel are statistically significant as monthly data are used in the initial estimates and the revisions do not therefore result from actual data replacing that produced by estimation. Because of the limited data, it does not make sense to comment on whether any of the accounts show statistically significant mean revisions between the first published estimate and that published twelve months later. However, within exports of services from the period commencing January 22, the revisions have all been upwards with the exception of January 23 where there was a downward revision. The largest revisions were to financial services, other business services and insurance services. These are large components within the total exports of services making up around 3%, 15% and 7% of total exports respectively. These components are all ones where the impact of revisions due to the use of data from annual inquiries with larger samples would be expected to be significant. Other business services will also have affected by the increase in the sample size of the ITIS survey mentioned above. Within imports of services during the same period, all the revisions made have again been upwards. Other business services and transportation are the main areas where the largest revisions from the first published estimate occur. These revisions may again be attributed to the receipt of annual inquiry data from much larger samples and in the case of other business services, as mentioned above, the increase in sample size of the ITIS survey. Volume and price indices for trade in goods As an additional analysis, we have examined the revision profile of the month-on-month changes in the headline volume and price indices for trade in goods between first publication and estimates twelve months later. The following table shows that at World level only the import price index showed a statistically significant mean revision. World Revisions in month-on-month percentage change between first publication and estimates twelve months later Average over the last 5 years Average over the last 5 years without regard to sign (average absolute revision) Exports Volume excluding oil and erratics (BOMA).3 1.1 Export Price (BQKR) -.1.3 Import Volume excluding oil and erratics (ELAL).2 1.1 Import Price (BQKS).1*.3 A statistical test has been applied to the average revision to find out if the mean revision is statistically significantly different from zero. An asterisk (*) indicates where the mean revision is statistically significant.
Within these World export figures only the EU export volume showed a statistically significant mean revision. While for prices only the EU import price index showed a statistically significant mean revision. The intention is that a similar article will appear in approximately twelve months time. Acknowledgements The author would like to thank Rafael Mastrangelo and Tricia Williams (Statistics and Analysis of Trade Unit, HM Customs and Excise) and Vivienne King (Trade in Services Branch, ONS) for their contributions to this article. 1 More information about the revisions material in this Release can be found on the National Statistics website: http://www.statistics.gov.uk/cci/article.asp?id=793. 2 http://www.statistics.gov.uk/cci/article.asp?id=119