Business investment in the UK: January to March 2016 provisional 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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This is an accredited national statistic.

Contact:
Email Alison McCrae

Release date:
26 May 2016

Next release:
30 June 2016

1. Main points

Gross fixed capital formation (GFCF) in volume terms was estimated to have risen by 0.5% from £76.6 billion to £76.9 billion between Quarter 4 (Oct to Dec) 2015 and Quarter 1 (Jan to Mar) 2016.

Between Quarter 4 2015 and Quarter 1 2016, business investment, in volume terms, was estimated to have decreased by 0.5% from £43.3 billion to £43.1 billion.

Between Quarter 1 2015 and Quarter 1 2016, GFCF was estimated to have increased by 1.1% from £76.1 billion to £76.9 billion.

Business investment was estimated to have decreased by 0.4% between Quarter 1 2015 and Quarter 1 2016, from £43.3 billion to £43.1 billion.

There are no revisions to estimates for previous quarters in this release.

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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 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 (published 22 August 2014), we moved to the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) from the Quarterly Survey of Capital Expenditure (CAPEX). The main reason was 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.

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4. Gross fixed capital formation and business investment

Gross fixed capital formation (GFCF) in Quarter 1 (Jan to Mar) 2016 was 1.1% higher than Quarter 1 2015, at £76.9 billion (Figure 2). In the first quarter of 2016, GFCF increased by 0.5% when compared with the previous quarter. GFCF has increased each quarter since Quarter 2 (Apr to June) 2013, with the exception of Quarter 4 (Oct to Dec) 2015, when it decreased by 1.1%. The main contributor to the rise was an increase in investment in transport equipment, up 31.5% on the quarter. The second largest contributor to the growth of GFCF was private sector costs of ownership transfer on non-produced assets which was estimated to have grown by 7.1% since Quarter 4 2015. This is the highest level that private sector costs of ownership transfer on non-produced assets has been since Quarter 2 2008. The latest Bank of England’s Summary of Business Conditions suggests this could be due to the bringing forward of buy-to-lets, ahead of the introduction of the rise in Stamp Duty on additional properties in April 2016.

Business investment in Quarter 1 2016 was £43.1 billion, which is a fall of 0.5% when compared with the previous quarter. This takes business investment to its lowest level since Quarter 4 2014 when it was £42.1 billion. It is 4.3% above the pre-economic downturn peak of Quarter 1 2008 (£41.4 billion).

As illustrated in Figure 4 there have now been 2 consecutive periods of contraction, quarter on quarter, in business investment. The last time this happened was in 2012 when there were 3 consecutive falls (Quarter 2, Quarter 3 (July to Sept) and Quarter 4).

Business investment fell by 0.4% when compared with the same quarter a year ago. The last time business investment decreased when compared with the same quarter a year ago was in Quarter 1 2013 when it fell by 1.8%.

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5. Summary tables

Table 1a shows that in Quarter 1(Jan to Mar) 2016, gross fixed capital formation (GFCF) increased by an estimated 0.5% to £76.9 billion when compared with Quarter 4 (Oct to Dec) 2015. Private sector cost of ownership transfer on non-produced assets (7.1%) and general government (2.5%) contributed most to the increase. These increases were partially offset by decreases in business investment (-0.5%), public corporations’ dwellings (-0.2%) and private sector dwellings (-0.3%).

Between Quarter 1 2015 and Quarter 1 2016, general government and business investment were the sectors showing the largest falls, general government having fallen by 3.9% and business investment by 0.4%. This was the first fall for business investment since Quarter 1 2013 and was mainly due to a fall in investment in other buildings and structures.

Table 1b shows that in Quarter 1 2016, the largest increase in level terms was in transport equipment, which grew by £1.1 billion (31.5%) to £4.5 billion from Quarter 4 2015. Information and computer technology equipment and other machinery and equipment saw the largest decrease in level terms, falling £0.8 billion (4.9%) from £15.4 billion in Quarter 4 2015 to £14.7 billion in Quarter 1 2016.

Between Quarter 1 2015 and Quarter 1 2016, dwellings showed the largest level increase when compared with the same quarter a year ago, having grown by £0.6 billion (3.4%) to £16.9 billion. Transport equipment saw the second largest increase, having grown by £0.4 billion (9.1%) to £4.5 billion.

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6. Economic background

Gross fixed capital formation (GFCF) increased by 1.1% in the first quarter (Jan to Mar) of 2016 when compared with the first quarter of 2015. This was the 12th consecutive quarter on quarter a year ago growth in GFCF but the pace of growth has started to slow down since the beginning of 2015. This is consistent with a slight slowdown in the quarter on quarter a year ago growth in GDP from 2.6% in Quarter 1 2015 to 2.0% in Quarter 1 2016.

Compared with the previous quarter, business investment contracted by 0.5% in Quarter 1 2016 following a 2.0% contraction in Quarter 4 (Oct to Dec) 2015. The contraction in business investment in the latest quarter has led to a reduction in its share of GFCF to 54.8%, its lowest share since Quarter 1 2014. In its latest Inflation Report, the Bank of England (BoE) noted that investment in the oil and gas industries has fallen in recent quarters. In 2015, ONS data shows that output in “other production” (which includes mining and quarrying) fell by 6.5% when compared with 2014. This coincided with a 41.6% fall in oil prices over 2015.

Business investment can also be affected by lending conditions. The BoE’s Inflation Report painted a mixed picture of lending conditions in the recent period. On the supply side there are improved financing conditions and an increase in the total amount of finance raised. However, on the demand side there is softening demand for loans by large companies, coupled with a slowdown in the commercial real estate market. Business investment also contracted on a quarter on quarter a year ago basis in Quarter 1 2016 which is the first quarter on quarter a year ago contraction since Quarter 1 2013.

Dwellings investment – which relates to the new construction and repair of new residential buildings – also contracted in the first quarter of 2016, by 0.2% but grew by 3.4% on a quarter on quarter a year ago basis. The contraction in dwelling investment is consistent with the contraction in total construction output where the downward pressure on the quarter mainly came from new work and repair and maintenance (Construction output in Great Britain: Mar 2016 and Jan to Mar 2016). The BoE Inflation Report also gives mixed signals about the housing market. According to the Bank’s Agents, investment has been limited by difficulties in recruiting skilled labour, however, housing starts and property transactions have increased.

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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 user requests. These are available to download free from our website. Enquiries about user-requested data 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 Sept) 2013, a bias adjustment was introduced to GFCF and its components in the provisional estimate. A bias adjustment of £1.5 billion has been included in the provisional (month 2) release for Quarter 1 (Jan to Mar) 2016. This adjustment will be reassessed in line with previous revisions and will be updated when Quarter 1 2016 is next published.

In order to try and improve the quality of the response from our customers, clearer instructions were added to the Quarterly Survey of Capital Expenditure, these updates are outlined in the provisional Quarter 1 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 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, Quarter 2 (Apr to June) 2015, Quarter 3 2015, Quarter 4 (Oct to Dec) 2015 and Quarter 1 2016. These adjustments are given in Table 2.

Revisions

In line with National Accounts revisions policy data in this release contain no revisions.

Survey response rates

Table 3 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 1 (Jan to Mar) 2016 month 2 (provisional) 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 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 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. Forthcoming changes for the Blue Book 2016 publication

In June 2016, we will publish revised figures for the UK National Accounts, including gross domestic product (GDP) and balance of payments.

Changes will be made in line with international standards adopted by all European Union (EU) Member States and with worldwide best practice. These, and additional improvements we are making, will ensure that our national accounts continue to provide a reliable framework for analysing the UK economy and comparing it with other countries.

The improvements made in June 2016 can be broadly split into 3 categories:

  1. methodological improvements which impact on GDP; these include improvements to the data sources and methods used to estimate imputed rental and improved estimates of non-complicit value added tax fraud

  2. improvements and corrections which do not impact on GDP; these include changes to the treatment of non-market output and social transfers in kind, incorporating the latest Foreign Direct Investment (FDI) benchmark, a correction to the measurement related to second homes and a correction/improvement to the measurement of shares and bonds

  3. other regular improvements and methodological changes; as detailed in the Impact of Blue Book 2016 changes on chained volume measure gross domestic product, 1997 to 2011 article

GFCF, in particular, will be affected by improvements to own account construction and corrections to processing errors for improvements made to dwellings and agricultural data. Additionally, updated and new Annual Business Survey (ABS) data for 2012 to 2013 will be included in the GFCF estimates as well as seasonal adjustment improvements resulting from the annual seasonal adjustment review process.

We are publishing a series of articles in the lead up to publication on 30 June 2016 and these can be found on the National Accounts articles page on our website.

3. Methods

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

On 19 May 2015 we published several articles explaining the changes that were implemented in the UK National Accounts (Blue Book) 2015, published on 30 October 2015. These articles describe changes related to meeting ESA 1995 requirements. These include changes that impacted 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).

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.

Composition of the data

Estimates of GFCF and business investment are produced twice each quarter: an early provisional estimate in month 2 (second estimate of GDP) and revised estimates in month 3 (Quarterly National Accounts). 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 Acquisitions and Disposals of Capital Assets Survey can be found in the Quarterly Acquisitions and Disposals of Capital Assets Survey Quality and Methodology Information report.

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.

4. 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.

5. 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.

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

6. 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.

7. Accessing data

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

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.

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Contact details for this Statistical bulletin

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