Business investment in the UK: April to June 2015 revised results

Estimates of short-term indicators of investment in non-financial assets; business investment and asset and sector breakdowns of total gross fixed capital formation.

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Contact:
Email Alison McCrae

Release date:
30 September 2015

Next release:
To be announced

1. Main points

  • These estimates are short-term indicators of investment in assets, such as dwellings, transport equipment, machinery, buildings and intangible assets. This release covers asset breakdowns of total gross fixed capital formation (GFCF), of which business investment is one component

  • This release includes improvements to methods and data emanating from the changes to Gross National Income (GNI) on the European System of Accounts 1995 (ESA 1995) basis. These estimates are consistent with the UK Annual National Accounts (Blue Book) 2015 and have been revised from Quarter 1 (Jan to Mar) 1997 to the latest period

  • All investment data referred to are estimates of seasonally adjusted chained volume measures

  • In Quarter 2 (Apr to June) 2015, GFCF was estimated to have increased by £0.8 billion (1.0%), compared with the previous quarter, to £76.3 billion. This is the highest level since Quarter 4 (Oct to Dec) 2007

  • In Quarter 2 (Apr to June) 2015, business investment was estimated to have increased by £0.7 billion (1.6%), compared with the previous quarter, to £43.5 billion

  • In Quarter 2 (Apr to June) 2015, GFCF was estimated to have increased by 3.4% compared with Quarter 2 (Apr to June) 2014

  • In Quarter 2 (Apr to June) 2015, business investment increased by 3.1% compared with Quarter 2 (Apr to June) 2014

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2. About this release

The estimates in this release are short-term indicators of investment in non-financial assets in the UK, such as dwellings, transport equipment, machinery, buildings and intellectual property products. This release covers not only business investment, but asset and sector breakdowns of total gross fixed capital formation (GFCF), of which business investment is one component.

Business investment is net investment by private and public corporations, these include investments in:

  • transport

  • information, technology and communications (ICT) equipment

  • other machinery and equipment

  • cultivated assets

  • intellectual property products (IPP, which includes investment in software, research and development, artistic originals and mineral exploration)

  • buildings and other structures

It does not include investment by central or local government, investment in dwellings or the costs associated with the transfer of non-produced assets (such as land). A full sector and asset hierarchy can be found in the background notes. Note that business investment is not an internationally recognised concept and therefore it should not be used to make international comparisons.

All investment data referred to in this bulletin are estimates of seasonally adjusted chained volume measures.

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3. Changes to the Business Investment Release

Estimates in this release have been compiled in accordance with the regulations for Gross National Income (GNI) on the European System of Accounts 1995 (ESA 1995) basis. As a result of the improvements to methods and data emanating from this, a number of changes have been implemented in this release, which is consistent with the UK Annual National Accounts (Blue Book) 2015. Further details about these changes can be found in Changes to National Accounts GFCF and Business Investment – impact of incorporating Blue Book 2015 changes. The estimates in this release have been revised from Quarter 1 (Jan to Mar) 1997 to the latest period.

Main changes

The main changes to the compilation of GFCF estimates are:

  • new data for do-it-yourself capital expenditure

  • improved estimates of Stamp Duty

  • improved estimates of research and development tax credits

  • improved estimates of small businesses

  • improved software deflator

  • annual updates to source data

Business Investment has been affected by 4 of the above changes:

  • improved estimates of research and development tax credits

  • improved estimates of small businesses

  • improved software deflator

  • annual updates to source data

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4. Changes to the Quarterly Survey of Capital Expenditure and methodological information

Changes to the Quarterly Survey of Capital Expenditure in Quarter 1 (Jan to Mar) 2015

As described in the Business Investment, Quarter 4 (Oct to Dec) 2014 Revised Results bulletin and in Changes to the Annual Business Survey, the Quarterly Survey of Capital Expenditure and the Survey into Business Spending on Capital Items, in 2015 (114.3 Kb Pdf), we moved to the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) from the Quarterly Survey of Capital Expenditure (CAPEX). The main reason is to move to the updated European System of Accounts (ESA) 2010 manual, the international guidance for national accounts.

The main changes to the survey are:

  • adding new questions to improve the quality of our estimates and to meet the latest European legislation requirements (ESA 2010)

  • removing the lower limit of £500 for the value of reported assets, so all relevant assets (even those below businesses’ Asset Register threshold) can be reported

  • including small tools used in production in the definition of GFCF

  • improving the questionnaire’s layout, including new sections and headings, to make completing the questionnaire easier

The data from the new questions will not be included in estimates of GFCF and its components until 2017, when there will be 2 years of data available for quality assurance.

Further methodological information including changes to the UK National Accounts

Estimates in this release have been compiled under ESA 2010 concepts and definitions, in compliance with the UK’s legal obligations in producing the National Accounts. Articles are available describing the methodology used to estimate GFCF and the impact of the changes implemented for ESA10 in September 2014.

On 19 May 2015 we published several articles explaining the changes that will be implemented in the UK National Accounts (Blue Book) 2015, to be published in October 2015. These articles describe changes related to ongoing work to meet ESA 1995 requirements. These include changes that impact GFCF and its components, specifically spending on repairs and maintenance of dwellings and exhaustiveness. There is a comprehensive list of all published articles relating to changes to the UK National Accounts (Blue Book). This list will be updated when new articles are published.

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5. Gross fixed capital formation and business investment

Figure 4 shows a large spike in business investment in Quarter 2 (Apr to June) 2005. This is due to the transfer of British Nuclear Fuels Ltd (BNFL). In April 2005, nuclear reactors were transferred from BNFL to the Nuclear Decommissioning Authority (NDA). BNFL is classified as a public corporation in National Accounts, while the NDA is a central government body. The business investment series includes investment by public corporations, but not government spending, the positive spike reflects the £15.6 billion transfer. More information on the transfer of BNFL can be found in section 3 of the background notes.

Summary tables

In Quarter 2 (Apr to June) 2015 total gross fixed capital formation increased by an estimated £0.8 billion (1.0%) compared with the previous quarter. Business investment also saw an increase of 1.6%, rising by an estimated £0.7 billion. Additionally, general government saw an increase of 2.7%, rising by an estimated £0.3 billion.

In Quarter 2 (Apr to Jun) 2015, intellectual property products saw the largest level increase rising by an estimated £0.6 billion (3.6%). ICT equipment and other machinery and equipment saw the second highest level increase of an estimated £0.5 billion (3.0%). These increases were partially offset by a decrease in dwellings of an estimated £0.6 billion (3.5%).

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6. Economic background

In Quarter 2 (Apr to June) 2015 business investment grew by 1.6%, the third successive quarter of growth. Business investment growth quarter on same quarter a year ago has been positive since Quarter 2 (Apr to June) 2013 but slowed to 3.1% in Quarter 2 (Apr to June) 2015 from a rate of 7.0% in the previous quarter. Gross fixed capital formation (GFCF) also grew robustly, by 3.4%. This increase is consistent with GDP which grew by 2.4% in Quarter 2 (Apr to June) 2015 on the same quarter a year ago.

By sector class, the increase in GFCF was driven by general government which was 11.0% higher than the same quarter a year earlier, and by business investment. In contrast, investment in dwellings by the private sector put downward pressure on overall GFCF. The weakening in private sector dwellings investment may be due to a slowdown in house price growth. The House Price Index (HPI) showed that UK house price growth was 5.2% in July 2015, compared with 5.7% in June 2015. On a quarterly basis, GFCF grew by 1.0%; this growth was also driven by business investment and general government spending. All asset classes grew strongly with the exception of dwellings which contracted in Quarter 2 (Apr to June) 2015, compared with the same period a year earlier. The easing of investment in dwellings is consistent with the softening in construction output growth in 2015. On a quarterly basis, the increase in GFCF was driven by investment in intellectual property which grew by 3.6%, and ICT and other machinery and equipment, which increased by 3.0% in Quarter 2 (Apr to June) 2015. Investment in dwellings also contracted and exerted downward pressure on GFCF.

In contrast, the Bank of England's Inflation Report for August 2015 noted that dwellings investment, which includes spending on new buildings and home improvements, has been growing strongly. This increase in investment is reflected by external indicators that show improving business confidence.

The Bank of England's Credit Conditions Survey for Q2 2015 showed a significant increase in demand for lending from small businesses in Quarter 2 (Apr to June) 2015. The demand for loans from large private non-financial corporations also increased in Quarter 2 (Apr to June) 2015. This may have encouraged businesses to invest using both internal and external sources of finance.

Furthermore, the Inflation Report showed that the increase in aggregate demand, which resulted in the desire for companies to increase capacity, is likely to have been a main driver of the strength in business investment. This is demonstrated by surveys which show that capacity utilisation is close to or a little above historical averages. For example, the CBI service sector survey has indicated that the number of firms which invest to expand capacity has risen to its pre-downturn level.

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7. Where to find more of our data

We also publish additional analyses of GFCF, business investment, and the Quarterly Acquisitions and Disposals of Capital Assets Survey, which have been created in response to ad hoc user requests. These are available to download free from our website. Enquiries about ad hoc requests may be made to gcf@ons.gov.uk.

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8. Adjustments, revisions and response rates

Adjustments

Large capital expenditure tends to be reported later in the data collection period than smaller expenditure. This means that larger expenditures are often included in the revised (month 3) results, but are not reported in time for the provisional (month 2) results, leading to a tendency towards upwards revisions in the later estimates for business investment and gross fixed capital formation (GFCF). Following investigation of the impact of this effect, from Quarter 3 (July to Sep) 2013, a bias adjustment was introduced to GFCF and its components in the provisional estimate. A bias adjustment of £1billion was included in the provisional (month 2) release for Quarter 2(Apr to June) 2015. This has been removed for the revised (month 3) release.

The Quarterly Survey of Capital Expenditure was improved by adding clearer instructions. As detailed in the provisional Quarter 1(Jan to Mar) 2015 Business Investment release, feedback from some respondents indicated that they had been misreporting their asset breakdown and were correcting this on the new questionnaire. We found that some respondents were reporting new construction work (NCW) as other capital equipment (OCE). From Quarter 1 (Jan to Mar) 2015 respondents to the survey are now reporting more in new construction work at the expense of other capital equipment. In order to remain consistent with the previous data, we have made some adjustments to the assets in the current price series in Quarter 1 (Jan to Mar) and Quarter 2 (Apr to June) 2015. Quality adjustments of -£1.5bn in Quarter 1 (Jan to Mar) and -£1.8bn in Quarter 2 (Apr to June) have been applied to asset buildings and +£1.5bn in Quarter 1 (Jan to Mar) and +£1.8bn in Quarter 2 (Apr to June) to other machinery. These adjustments will be reviewed as the survey response increases.

Forecast data

In this release, estimates of investment in research and development and artistic originals have been forecast.

Revisions

Data in this release has been revised from Quarter 1 (Jan to Mar) 1997 to Quarter 2 (Apr to Jun) 2015.

Survey response rates

Table 2 presents the revised (month 3) response rates for the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS). The estimates in this release are based on the Quarter 2 (Apr to June) 2015 month 3 (revised) survey results.

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9 .Background notes

  1. Understanding the data

    Short guide to business investment

    Gross fixed capital formation (GFCF) is used in the compilation of the UK National Accounts’ expenditure measure of the Second Estimate of Gross Domestic Product (GDP) at month 2 and the Quarterly National Accounts (QNA) at each calendar quarter. It is an estimate of net capital expenditure by both the public and private sectors. Examples of capital expenditure include spending on machinery and plant, transport equipment, software, new dwellings and other buildings, and major improvements to existing buildings and structures, such as roads. The additional assets research and development and military weapons systems were introduced in the Quarter 2 (Apr to June) 2014 Revised Results release, published November 2014, consistent with the European System of Accounts 2010, and with the UK Annual National Accounts (Blue Book) 2014.

    Business investment estimates are a short term indicator of net capital expenditure by businesses within the UK, at current prices and chained volume measures, both seasonally and not seasonally adjusted. Business investment is one component of GFCF. Business investment estimates exclude expenditure on dwellings and the costs associated with the transfer of ownership of non-produced assets, and capital expenditure by local and central government.

    Interpreting the data

    When making comparisons it is recommended that users focus on chained volume, seasonally adjusted, estimates as these show underlying movements rather than seasonal movements, and have the effect of changes in prices removed.

    Use of the data

    Estimates from this release are used by the ONS, in the compilation of the UK National Accounts, the Bank of England and Her Majesty’s Treasury to monitor economic performance and inform monetary and fiscal policy decisions. Business investment is also used by other government departments, such as the Department for Business, Innovation and Skills. In addition, these estimates are frequently used by the business, education and research communities, the media and the general public.

  2. Methods

    Details of the business investment methodology are published in the Quality and Methodology Information (128.9 Kb Pdf). This report describes the intended uses of the estimates presented in this publication, their general quality and the methods used to produce them.

    Composition of the data

    Estimates of GFCF and business investment are produced twice each quarter: an early provisional estimate in month 2 and revised estimates in month 3. The largest component of the estimates is collected via the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS). This survey collects data on the acquisition and disposal of capital assets from the manufacturing, other production, construction, distribution and other services sectors. Other main sources for GFCF include data returned by local and central government and public corporations, data on construction, data on new dwellings and improvements to dwellings, and artistic originals. GFCF by local and central government, investment in new dwellings and the costs associated with the transfer of non-produced assets (primarily costs associated with the transfer of land and existing buildings) are excluded from the business investment estimates, but included in total GFCF. The acquisition and disposal of land and existing buildings, including dwellings, is excluded from both the business investment and GFCF estimates.

    More information about the Quarterly Survey of Capital Expenditure can be found in the Summary Quality Report for Quarterly Capital Expenditure Inquiry (287.8 Kb Pdf).

    Definitions and explanations

    Current price (CP)

    Current prices are the actual or estimated recorded monetary value over a defined period. They show the value for each item expressed in terms of the prices of that period.

    Deflation and chained volume measure (CVM)

    Investment is measured across several time periods. The values measured will include both the change in the volume of investment and the effect of the change of prices over the period. Deflation is the process whereby the effect of price change is removed from a set of values.

    Deflation can be done simply by dividing a current price estimate by a deflator, which measures the movement in prices. Doing this creates a constant price series. For deflators to accurately measure the movement in prices they need to accurately reflect changing investment habits. We do this by rebasing deflators.

    Rebasing deflators has a significant effect on a constant price series and would cause significant revisions to the investment data. To avoid this it has been the standard to not rebase deflators annually. This, however, means the deflators are not accurately measuring price changes.

    To resolve this we estimate volumes using chained volume measures, which are derived by linking together (compounding) movements in volumes; calculated using the prices of the previous financial year; and applying the movements to the current price estimates of the reference year. This allows us to remove both the effect of prices and rebasing.

    Seasonally adjusted (SA)

    Seasonal adjustment aids interpretation by removing effects associated with the time of the year or the arrangement of the calendar, which could obscure movements of interest.

    Asset and sector hierarchies

    The diagrams show the institutional and sector hierarchies for GFCF, as set out by the European System of Accounts 2010. The asset hierarchy for business investment is also set out. Business investment is not an internationally defined concept, and the UK’s estimates cannot be compared with those of other countries due to definitional differences.

    A full list of sector codes, for example S.11001 = public corporations, is available in the reference tables

  3. Further information on methodology

    Further information about the UK National Accounts and the programme of continuous improvement can be found at:

    British Nuclear Fuels Ltd (BNFL)

    In April 2005 nuclear reactors were transferred from British Nuclear Fuels Ltd (BNFL) to the Nuclear Decommissioning Authority (NDA). BNFL is classified as a public corporation in National Accounts and the NDA as a central government body. The capital formation estimates in this release reflect this transfer from the public corporations manufacturing category. The value of the transfer was negative £15.6 billion. The negative value reflects the fact that the reactors are at the end of their productive lives and have large decommissioning and clean-up liabilities. This shows up as a prominent trough in Quarter 2 (Apr to June) 2005 in the general government series, and a complementary peak in Quarter 2 (Apr to June) of the business investment series, which includes investment by public corporations (except dwellings and transfer costs). A more detailed explanation about the transfer can be found in the December 2006 Business Investment release (414.3 Kb Pdf).

    Aircraft imports

    On 1 January 2011 a change was made to the zero-rating of VAT on qualifying aircraft. More information on this can be found on the HMRC website. This may have contributed to the high level of aircraft imports for Quarter 4 (Oct to Dec) 2010 and the low level of aircraft imports for Quarter 1 (Jan to Mar) 2011.

  4. Other relevant sources of data

    International business investment comparisons are not available on a like-for-like basis, as the compilation of European statistics on business investment differs from the data provided within this release. However European estimates of business investment provided by Eurostat, the European statistical office can be found on the Eurostat website.

    Business investment in the UK accounts for over half of total gross fixed capital formation (GFCF).

    The GSS Business Statistics – interactive user guide is an interactive tool to help you find what business and economic statistics are available, and choose the right data for your needs.
    ONS publishes the following statistical releases, which provide complementary information on UK business and economic performance:

    • Profitability of UK Companies - quarterly data on capital employed by Private Non-Financial Corporation’s (PNFCs). Contains annual, net and gross rates of return (expressed as percentages) on capital used by PNFCs
    • UK Economic Accounts - quarterly detailed estimates of national product, income and expenditure, UK sector accounts and UK balance of payments, including data on GFCF
    • Labour Market Statistics - monthly data on employment, unemployment, economic inactivity, claimant count, average earnings, labour productivity, vacancies and labour disputes
  5. Feedback

    We welcome your feedback on the business investment release and data. Please contact gcf@ons.gov.uk. You can also engage in discussion about business investment, and share information with other users or producers of financial and economic statistics by visiting the Financial and Economic Statistics User Group on the Royal Statistical Society’s StatsUserNet discussion forum.

  6. Publication policy

    Details of the policy governing the release of new data are available from the Statistics Authority or from the Media Relations Office email: media.relations@ons.gov.uk. A list of the names (40.3 Kb Pdf) of those given pre-publication access to the contents of this bulletin is also available.

  7. Accessing data

    The business investment statistical bulletin conforms to the standards set out in the UK Statistics Authority Code of Practice.

    Time series used in this bulletin and time series datasets carry unique identifiers for ease of use. More information on these identifiers is available in the article published on 25 August 2011 New series identifiers for GDP(O), IoS and IoP and GCF (35.4 Kb Pdf).

  8. Code of Practice for Official Statistics:

    National Statistics are produced to high professional standards set out in the Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference. © Crown copyright 2015.

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  10. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gov.uk

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Contact details for this Statistical bulletin

Alison McCrae
gcf@ons.gov.uk
Telephone: +44 (0)1633 455250