Business investment in the UK: July to September 2019 revised results

• Business investment growth, in volume terms, was flat in Quarter 3 (July to Sept) 2019.
• Gross fixed capital formation (GFCF), in volume terms, increased by 0.2% in Quarter 3 2019.
• When compared with the same quarter a year ago, business investment increased by 0.5% and GFCF increased by 0.6% in Quarter 3 2019.
• ICT equipment, other machinery and equipment made the largest positive contribution to business investment growth in Quarter 3 2019; other buildings and structures made the largest negative contribution.
• On a sector basis, private sector dwellings made the largest positive contribution to GFCF growth in Quarter 3 2019.

Business investment saw no growth between Quarter 2 (Apr to June) 2019 and Quarter 3 (July to Sept) 2019, following an increase of 0.1% in Quarter 2 2019.

Increases in information and communication technology (ICT) equipment, other machinery and equipment, and intellectual property products (IPP) were offset by decreases in transport equipment and other buildings and structures. (Figure 1)

These data are seasonally adjusted using data from multiple years to derive adjustments for each quarter. We have seen some unusual seasonal behaviour through the quarters of 2019. When data for the fourth quarter become available, we will be able to deliver a better view on the profile of 2019.

When compared with the same quarter a year ago, business investment grew by 0.5% in Quarter 3 2019. This is the first time business investment has increased compared with the same quarter of the previous year since Quarter 1 (Jan to Mar) 2018. Other buildings and structures, transport equipment and IPP all grew over this period; however these increases were partially offset by a fall in ICT equipment, other machinery, and equipment.

Business investment fell in each quarter of 2018, with Quarter 4 (Oct to Dec) 2018 being the largest four-quarter fall since Quarter 4 2009. Positive quarter-on-quarter growth in the first two quarters of 2019, broadly cancelled out the falls in 2018, with the series returning to positive four quarter growth in Quarter 3 2019.

The Bank of England, in its Agents’ summary of business conditions for Quarter 3 (July to Sept) 2019, stated that “a large proportion of companies were holding off investments, even for projects where payback times were short”, with the Agents’ score for investment intentions remaining at a nine-year low.

In its November Monetary Policy Report, the Bank of England highlights that weaker global growth reflects slower investment growth across the G7 economies, however, business investment growth has been lower in the UK than in other G7 countries, which is consistent with research on the impact of Brexit on business investment in the UK (Bloom and others (2019)).

Other sources such as the IHS Markit/CIPS Purchasing Managers Index (PMI) and the BDO business trends report (PDF, 321KB) pointed to increased uncertainty and decreased optimism in Quarter 3 2019. While the British Chambers of Commerce (BCC) said that findings from their Quarterly Economic Survey pointed to “uncertainty over Brexit and a notable slowing in global growth prospects dragging down almost all key indicators in the quarter”, including investment intentions in both plant and machinery and training.

The Bank of England also reported signs that credit conditions have tightened slightly, with corporate contacts reporting that “finance has become slightly more expensive or less available over the past year”.

Business investment is now 1.5% above the level seen in Quarter 2 2016, the quarter in which the EU referendum took place, and has decreased by 0.1% since Quarter 3 (July to Sept) 2016, the quarter following the EU referendum. Intellectual property products (IPP) and other buildings and structures contributed positively to growth in business investment over these periods.

Further analysis can be found in the article Business investment in the UK: analysis by asset, published 29 March 2019.

Gross fixed capital formation (GFCF) grew by 0.2%, in the latest quarter, following a fall of 0.6% in Quarter 2 (Apr to June) 2019.

On a quarter-on-quarter basis, the largest positive contribution came from private sector dwellings, which contributed 0.2 percentage points (Figure 3). General government investment decreased for the second consecutive quarter. Business investment made no contribution to GFCF growth.

Between Quarter 3 (July to Sept) 2018 and Quarter 3 2019, GFCF increased by 0.6%. Private sector dwellings again made the largest positive contribution, contributing 0.5 percentage points, while business investment contributed 0.3 percentage points. These increases were partially offset by general government investment and private sector transfer costs, which both contributed negative 0.1 percentage points for the same period.

According to the Bank of England’s Monetary Policy Report, housing investment remains subdued, with the Bank of England citing increased uncertainty about the outlook for the housing market and concerns about the economic situation and lower rates of house price inflation.

Construction output in Great Britain: October 2019 and new orders July to September 2019, published on 10 December 2019, shows private housing construction work in the three months to September 2019 was flat, with an increase in new work being offset by a decrease in repair and maintenance.

It should be noted that these estimates have been revised as part of the Quarterly National Accounts and as such may not be consistent with construction data used in this gross fixed capital formation (GFCF) dataset. Estimates of Construction output in Great Britain will be updated on 13 January 2019.

While there are some differences between estimates for the construction of private housing and the private sector dwellings series for GFCF, these are largely because of conceptual and methodological differences. More information about these can be found in the recent article Conceptual and methodological differences between private housing construction output and gross fixed capital formation private sector dwellings published 31 May 2019.

Information and communication technology (ICT) equipment, other machinery, and equipment made the largest contribution to the 0.2% increase in gross fixed capital formation (GFCF) in Quarter 3 (July to Sept) 2019, contributing 1.1 percentage points (Figure 4).

ICT equipment and other machinery and equipment grew by 7.5%, following a fall of 11.9% in Quarter 2 (Apr to June) 2019. This was largely driven by private sector investment.

Other buildings and structures and transfer costs contributed negative 1.2 percentage points to GFCF growth.

Between Quarter 3 2018 and Quarter 3 2019, many assets saw similar positive contributions except ICT equipment and other machinery and equipment, which contributed negative 1.5 percentage points.

In Quarter 3 (July to Sept) 2019, growth in gross fixed capital formation (GFCF) for the G7 countries was mixed. Four countries, including the UK and France saw growth compared with Quarter 2 (Apr to June) 2019, while three countries experienced a fall in GFCF over the same period. Canada saw the strongest growth in the G7, with GFCF increasing by 2.4% compared with Quarter 2 2019, while the biggest falls were in Italy and the United States; GFCF in both these countries decreased by 0.2%.

Compared to Quarter 3 2018, UK GFCF growth was the lowest in the G7, with Canada and the US the only other countries where growth was less than 2% over this period.

Since Quarter 1 (Jan to Mar) 2016, GFCF in the UK has increased by 3.4%. No other G7 country has seen less GFCF growth in this period. France and the US have seen the largest increases in GFCF growth in this period, with growth of 13.0% and 10.5% respectively. (Figure 6)

UK GFCF growth since the end of 2016 has been broadly flatter than the rest of the G7 after stronger growth in Quarter 2 and Quarter 3 2016.

For more comprehensive comparisons of GFCF, please refer to An international comparison of gross fixed capital formation, published November 2017 and An analysis of investment expenditure in the UK and other Organisation for Economic Co-operation and Development nations, published May 2018.

The estimates quoted in this international comparison section are the latest available estimates at the time of preparation of this statistical bulletin and may have subsequently been revised.

Revisions have been made to gross fixed capital formation (GFCF) and business investment from Quarter 1 (Jan to Mar) 2018, in line with the National Accounts Revisions Policy. These are due mainly to taking on later source data in addition to revisions due to seasonal adjustment. Revisions by sector and asset for GFCF can be found in the revisions section of the GFCF by sector and asset datasets accompanying this release in addition to revision triangles and a real-time database for business investment.

GFCF has been revised on average by 0.1 percentage points between Quarter 1 2018 and Quarter 3 (July to Sept) 2019, with revisions ranging between negative 0.3 percentage points and positive 0.4 percentage points. Over the same period business investment has also been revised on average by 0.1 percentage points, with revisions ranging between negative 0.2 percentage points and positive 0.5 percentage points (Figure 7).

On average, information and communication technology (ICT) equipment and other machinery and equipment was the largest positive contributor to revisions in this period, while other buildings and structures and transfer costs was the largest negative contributor.

Revisions to 2018

Revisions to GFCF in 2018 are mixed, with Quarter 1 and Quarter 3 being revised down, Quarter 2 (Apr to June) being revised up and Quarter 4 (Oct to Dec) remaining unchanged. These revisions were largely due to revisions to general government data. Revisions to business investment can be largely attributed to the reprofiling of series due to seasonal adjustment.

Quarter 1 2019

GFCF growth in Quarter 1 2019 has been revised up by 0.2 percentage points to 1.1%. This was largely due to an upward revision to other buildings and transfer costs and ICT equipment and other machinery and equipment which were impacted by revised general government data and revisions due to seasonal adjustment.

Quarter 2 2019

The upward revisions to GFCF and business investment growth were largely due to later survey data, which impacted other buildings and structures and transfer costs and ICT equipment and other machinery and equipment.

Quarter 3 2019

GFCF in Quarter 3 2019 was revised up by 0.4 percentage points to 0.2%. This was largely due to revisions to private sector dwellings.

The estimates in this release are short-term indicators of investment in non-financial assets in the UK, such as dwellings (residential buildings), transport equipment (planes, trains and automobiles), machinery (electrical equipment), buildings (non-residential buildings and roads) and intellectual property products (assets without physical properties – formerly known as intangibles). 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 and communication technology (ICT) equipment
• other machinery and equipment
• cultivated assets (such as livestock and vineyards)
• intellectual property products (IPP, which includes investment in software, research and development, artistic originals and mineral exploration)
• other buildings and structures

Business investment 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). Business investment is not an internationally recognised concept and it should not be used to make international comparisons, however, GFCF is an internationally recognised standard and is therefore internationally comparable. Please see A short guide to GFCF and business investment for more detailed information, including asset and sector hierarchies.

All investment data referred to in this bulletin are estimates of seasonally adjusted chained volume measures. To see a time series of the data please use our time series datasets.

The Business investment Quality and Methodology Information includes information on the quality and methodology used in the production of business investment statistics.

International Financial Reporting Standards (IFRS16)

As reported in Business investment in the UK: April to June 2019 revised results, adjustments have been made to account for the differing treatment of operating leases in company account and the European System of Accounts 2010 (ESA10).

We have made adjustments of approximately negative £222 million, negative £133 million and negative £188 million in Quarter 1 (Jan to Mar) 2019, Quarter 2 (Apr to June) 2019 and Quarter 3 (July to Sept) 2019 respectively, to remove the quantified impact of the introduction of IFRS16 and better reflect underlying growth for GFCF and business investment. This adjustment has been applied mainly to reflect the impact on generally larger companies. The asset most affected by the introduction of IFRS16 in Quarter 1 2019 was ICT equipment and other machinery and equipment. In Quarter 2 2019 and Quarter 3 2019, the asset most affected was intellectual property products.

We will continue to adjust for IFRS16’s impact in the future because of the inclusion of operating leases being contrary to the requirements of ESA10.

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.

We publish the following statistical releases, which provide complementary information on UK business and economic performance.

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Business investment Quality and Methodology Information (QMI) report.

The changes signposted in this bulletin have not yet been reflected in either the Quarterly Acquisitions and Disposals of Capital Assets Survey QMI or the Business investment QMI, but changes will be incorporated into revised QMIs in the future. We last updated the Business investment QMI on 30 January 2018.

Adjustments

Large capital expenditure tends to be reported later in the data collection period than smaller capital 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 upward 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 Sept) 2013, in the provisional estimate a bias adjustment is introduced to business investment and its components. At the provisional estimate of business investment for Quarter 3 2019, the bias adjustment was positive £976 million. This has been removed in this revised release.

Survey response rates

Table 1 presents the provisional, revised and final response rates for the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) for the latest quarters. Estimates in this release are based on the Quarter 3 (July to Sept) 2019 revised survey results.