1. Main points

  • Gross fixed capital formation (GFCF), in volume terms, increased by 0.1% to £78.1 billion in Quarter 4 (Oct to Dec) 2016, when compared with Quarter 3 (July to Sept) 2016 (£77.9 billion).

  • Between Quarter 3 2016 and Quarter 4 2016, business investment, in volume terms, was estimated to have decreased by 0.9%, from £43.9 billion to £43.5 billion.

  • Between Quarter 4 2015 and Quarter 4 2016, GFCF was estimated to have increased by 1.0%, from £77.3 billion to £78.1 billion.

  • Business investment was estimated to have decreased by 0.9% between Quarter 4 2015 and Quarter 4 2016, from £43.9 billion to £43.5 billion.

  • Between 2015 and 2016, GFCF was estimated to have increased by 0.5%, an increase of £1.7 billion.

  • Business investment was estimated to have decreased by £2.7 billion between 2015 and 2016, a decrease of 1.5%.

  • In line with the National Accounts Revisions Policy, the earliest period being revised in this release is Quarter 1 (Jan to Mar) 2016.

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2. Future changes

Blue Book 2017

We have recently published an article, annual improvements to gross fixed capital formation source data for Blue Book 2017. This article was published on 16 February 2017 describing the changes that will be introduced in the September business investment release consistent with Blue Book 2017. The changes include updates to source data and methodology improvements.

Purchased software

Following a quality review, it has been identified that the methodology used to estimate elements of purchased software within gross fixed capital formation (GFCF) has led to some double-counting from 1997 onwards. When this issue is amended in the Blue Book 2017, it will reduce the level of GFCF across the period by around 1.1% per year. The average impact on quarter-on-quarter GFCF growth is negative 0.02% and the average impact on quarter-on-quarter gross domestic product (GDP) growth is 0.00%.

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3. What’s changed in this release?

This is the second release using the improved gross fixed capital formation (GFCF) estimation system, redeveloped in line with the 5-year strategy for the UK National Accounts, 2015 to 2020 published in July 2015 and recommendations from the Bean Review. This has resulted in some methodological changes to the new GFCF system, including improved deflation and seasonal-adjustment methodology.

Alongside this release, we have produced Business Investment by asset and industry estimates using the new GFCF estimation system for the first time. Further information on the methods changes introduced in the new GFCF estimation system can be found in the article Changes to the Gross Fixed Capital Formation methodology and processing.

A data impact assessment of the new GFCF system (at the time of its introduction in the publication Business investment in the UK: Oct to Dec 2016 provisional results) for the periods Quarter 1 (Jan to Mar) 2016 to Quarter 3 (July to Sept) 2016 can be found in the article Gross fixed capital formation (GFCF) new system deployment and data impact assessment.

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4. Things you need to know 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 and communication technology (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. 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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5. Gross fixed capital formation grows, but business investment falls

Figure 1 shows that the annual level of gross fixed capital formation (GFCF) increased in 2016 to £310.8 billion (0.5%) compared with 2015. This is the smallest increase since 2009 when GFCF fell by 15.2%.

Figure 2 shows that in Quarter 4 (Oct to Dec) 2016, GFCF increased by 0.1% to £78.1 billion when compared with Quarter 3 (July to Sept) 2016 (£77.9 billion). Compared with the same quarter a year ago, GFCF increased by £0.8 billion (1.0%). The increase between Quarter 4 2015 and Quarter 4 2016 has been driven by an increase in investment by general government, which contributed 1.1 percentage points to growth.

GFCF is now 2.0% above the pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008 (£76.5 billion) and 30.4% greater than the level seen at the peak of the financial crisis in Quarter 2 (Apr to June ) 2009.

As seen in Figure 2, quarterly growth in GFCF in 2016 has been subdued in comparison with more recent years, with 0.1% growth between Quarter 3 and Quarter 4 2016. This follows 0.0% growth in Quarter 1 2016, an increase of 0.2% in Quarter 2 2016 and 0.6% in Quarter 3 2016.

The annual level of business investment (Figure 3) decreased by 1.5% to £174.5 billion in 2016, when compared with 2015. This is the first annual decrease in business investment since 2009. This decrease is mainly caused by weakness in investment in other buildings and structures, and information and communication technology (ICT) equipment and other machinery and equipment.

Business investment in Quarter 4 2016 decreased by 0.9% (Figure 4) to £43.5 billion, when compared with the previous quarter. This was mainly due to a decrease in investment in other buildings and structures and transport equipment. Business investment is now 6.3% above the pre-economic downturn peak of Quarter 1 2008 (£40.9 billion).

Business investment in Quarter 4 2016 decreased by 0.9% (£0.4 billion) when compared with the same quarter a year ago. This marks 4 consecutive periods of negative growth in business investment when compared with the same quarter a year earlier. Annually, business investment contracted by 1.5% in 2016 when compared with 2015.

As can be seen in Figure 4, business investment in 2016 has seen 2 consecutive quarters of positive growth in Quarter 2 (Apr to June) 2016 (0.8%) and Quarter 3 (July to Sept) 2016 (0.4%) and 2 quarters of more negative growth in Quarter 1 (Jan to Mar) 2016 (1.1%) and Quarter 4 (Oct to Dec) 2016 (0.9%).

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6. Summary tables

Table 1 shows that in sector terms, the largest level increase in Quarter 4 (Oct to Dec) 2016 was seen in private sector dwellings, which rose by £0.2 billion (1.4%) to £16.0 billion. Increases were also seen in general government, which increased by £0.2 billion (1.3%) and private sector cost of ownership transfer of non-produced assets, which increased by £0.1 billion (2.3%). The largest decrease came from business investment, which fell by £0.4 billion (0.9%) when compared with Quarter 3 2016.

When compared with the same quarter a year earlier, GFCF increased by £0.8 billion (1.0%). The largest level increases in Quarter 4 2016 were seen in general government, which increased by £0.8 billion (7.2%) and private sector dwellings, which increased by £0.4 billion (2.6%). The largest decrease came from business investment, which fell by £0.4 billion (0.9%).

Table 2 shows that in asset terms, the largest level increase, quarter-on-quarter, in Quarter 4 2016 was in dwellings, which increased by £0.4 billion (2.2%) to £17.1 billion. Intellectual property products also saw a level increase of £0.3 billion (1.5%). The largest decrease quarter-on-quarter was seen in other buildings and structures and transfer costs, which decreased by £0.3 billion (1.2%).

When compared with the same quarter a year earlier, transport equipment saw the largest level increase of £0.7 billion (18.0%). Intellectual property products also increased quarter on same quarter a year ago, having grown by £0.6 billion (3.9%). These increases were partially offset by a decrease in other buildings and structures and transfer costs, which decreased by 3.7% (£0.9 billion).

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7. Revisions to gross fixed capital formation (GFCF) and business investment

Data in this release have been revised from Quarter 1 (Jan to Mar) 2016 to Quarter 4 (Oct to Dec) 2016 in line with the National Accounts Revisions Policy. A detailed breakdown of past revisions to business investment can be found using the revisions triangles which accompany this release.

Reasons for revisions in this release are due to updated source data and revised seasonal adjustment. Figure 5 shows current GFCF quarterly growth throughout 2016 compared with that published in the Quarter 4 (Oct to Dec) 2016 provisional release.

The largest revision to growth of gross fixed capital formation (GFCF) shown in Figure 5 is seen in Quarter 2 (Apr to Jun) 2016, which has been revised upwards from negative 0.2% to 0.2%. This is due to revisions of estimates in general government. The general government revision in Quarter 2 (Apr to Jun) 2016 has also impacted Quarter 3 (July to Sept) 2016, contributing to a negative revision from 0.9% to 0.6%.

Business investment revisions are shown in Figure 6. The largest revision is in Quarter 3 2016, which has been revised down from 0.7% to 0.4%. This downward revision is mainly due to decreases in transport equipment and information and communication technology (ICT) and other machinery and equipment.

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8. Economic background

Gross fixed capital formation (GFCF) is estimated to have grown by 1.0% between Quarter 4 (Oct to Dec) 2015 and Quarter 4 2016, following slightly negative growth of negative 0.1% from Quarter 3 (July to Sept) 2015 to Quarter 3 2016. For the calendar year of 2016, GFCF was estimated to have grown by 0.5%, the lowest rate of growth for a calendar year since 2009. Total GFCF growth has been consistently slowing since 2014. Quarter on same quarter a year ago growth averaged 6.8% in 2014, fell to 3.5% in 2015 then fell further to 0.5% for 2016. Quarter-on-quarter growth for GFCF saw a slight increase in growth of 0.1% from Quarter 3 2016 to Quarter 4 2016.

On a sector basis, the increase in GFCF quarter on same quarter a year ago was mainly driven by general government, which contributed 1.1 percentage points to growth. This was partially offset by a fall in business investment in the same period, which contributed negative 0.5 percentage points. Business investment is estimated to have fallen by 0.9% between Quarter 3 2016 and Quarter 4 2016. An important factor to consider when looking at business investment is the availability or supply of credit. In the most recent Bank of England Credit Conditions Review, the supply of lending to firms was found to have remained above normal levels. However, survey data suggested that corporate demand for credit continued to soften, mirroring a trend seen in Quarter 3 2016.

On an asset basis, the quarter on same quarter a year ago increase in GFCF was mainly driven by transport equipment and intellectual property products, which contributed 0.9 and 0.8 percentage points to growth respectively. Other buildings, structures and transfer costs partially offset these increases, contributing negative 1.2 percentage points to growth.

Quarter 4 2016 marks 2 full quarters since the UK voted to leave the EU . The Bank of England has upgraded its forecasts for business investment and gross domestic product (GDP) in light of stronger than expected economic performance since the result. The Monetary Policy Committee (MPC) cites one of the main reasons for this as the increased confidence in the global economy in the immediate future (particularly in the US) . However, the MPC does predict business investment to be lower in 3 years’ time than the projected level prior to the referendum.

Developments in the housing market can also be an important indicator of investment and wider activity in the economy. The construction sector grew by 1.0% in Quarter 4 2016 when compared with Quarter 3 2016, contributing to annual growth of 2.4% in 2016 (Construction output in Great Britain: Jan 2016 and new orders Oct to Dec 2016). This is mainly driven by an increase in new housing work. Average house prices in the UK have increased by 7.2% in the year to December 2016, continuing the strong growth seen since the end of 2013. However, annual growth in house prices has been weaker in the second half of 2016 compared with the first half of the year.

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9. 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 user requests. For enquiries about user-requested data email gcf@ons.gsi.gov.uk.

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10. Adjustments and response rates

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 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 Sept) 2013, in the revised estimate a bias adjustment was introduced to GFCF and its components.

A bias adjustment has not been included in the revised (month 3) release for Quarter 4 (Oct to Dec) 2016.

In order to try and improve the quality of the response from our data suppliers, clearer instructions were added to the Quarterly Survey of Capital Expenditure. These updates are outlined 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 as other capital equipment (OCE). From Quarter 1 2015, respondents to the survey are now reporting more in new construction work at the expense of other capital equipment. To remain consistent with the previous data, we have made some adjustments to the assets in the current price series in Quarter 1 2015 to Quarter 4 2016. These adjustments are shown in Table 3.

Survey response rates

Table 4 presents the provisional (month 2) and 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 4 2016 month 3 (revised) survey results.

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11. Quality and methodology

The Business investment Quality and Methodology Information document contains important information on:

  • the strengths and limitations of the data and how it compares with related data

  • uses and users of the data

  • how the output was created

  • the quality of the output including the accuracy of the data

The changes signposted in this bulletin (see Background notes – sections 4 and 5) have not yet been reflected in either the Quality Survey of Capital Expenditure QMI or the Business Investment QMI, but changes will be incorporated into revised QMIs in the future.

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13 .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 approach to the measurement of GDP in 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 plant and machinery, 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 you 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 Office for National Statistics (ONS) in the compilation of the UK National Accounts, and by the Bank of England and Her Majesty’s Treasury to monitor economic performance and to inform monetary and fiscal policy decisions. Business investment is also used by other government departments, such as the Department for Business, Energy and Industrial Strategy. In addition, these estimates are frequently used by the business, education and research communities, the media and the general public.

2. 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 datasets.

3. Guide to published assets

4. Changes to the Quarterly Acquisitions and Disposals of Capital Assets Survey in Quarter 3 (July to Sept) 2016

Following a consultation on changes to ONS products, completed in February 2016, in our response we stated that we would be reducing the sample size of the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) by 10%. This reduction was implemented in the Quarter 3 (July to Sept) 2016 provisional release so that the survey sample size is now 24,500, compared with 27,000 previously. The sample reduction has been managed to ensure that it does not affect the quality of our estimates. We will continue to monitor the effect of the sample reduction.

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

In Quarter 1 (Jan to Mar) 2015, we moved to the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) from the Quarterly Survey of Capital Expenditure (CAPEX). This is outlined 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 (published 22 August 2014). The main reason was to move to the updated European System of Accounts (ESA) 2010 manual which provides 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.

6. 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 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.

7. Feedback

We welcome your feedback on the business investment release and data. Please contact gcf@ons.gsi.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.

8. Accessing data

To see a time series of the data please use our time series datasets.

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