Business investment in the UK: January to March 2016 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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30 September 2016

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 GDP growth is 0.00%.

This is an accredited national statistic.

Contact:
Email Alison McCrae

Release date:
30 June 2016

Next release:
26 August 2016

1. Main points

Gross fixed capital formation (GFCF) in volume terms was estimated to have decreased by 0.1% between Quarter 4 (Oct to Dec) 2015 and Quarter 1 (Jan to Mar) 2016 to £77.1 billion. Previously GFCF was estimated to be £76.9 billion in Quarter 1 2016 and to have risen by 0.5% compared with the previous quarter.

Between Quarter 4 2015 and Quarter 1 2016, business investment, in volume terms, was estimated to have decreased by 0.6% from £43.9 billion to £43.7 billion, revised down 0.1 percentage points from the previously estimated 0.5% decrease.

Between Quarter 1 2015 and Quarter 1 2016, GFCF was estimated to have increased by 0.7%, from £76.5 billion to £77.1 billion, revised down from the previously estimated 1.1% increase.

Business investment was estimated to have decreased by 0.8% between Quarter 1 2015 and Quarter 1 2016, from £44.0 billion to £43.7 billion, revised down from the previously estimated 0.4% decrease.

GFCF increased by 3.3% between 2014 and 2015. Business investment increased by 5.0% in the same period. Previously, GFCF was estimated to have risen by 4.1% between 2014 and 2015 and business investment to have increased by 5.2%.

GFCF for Quarter 1 2016 was 0.7% above the pre-economic downturn peak for GDP of Quarter 1 2008, while business investment was 6.7% above the same peak.

Estimates in this bulletin are consistent with the United Kingdom National Accounts The Blue Book 2016 Edition to be published on 29 July 2016. All data have been revised from their start point and the reference year for the chained volume estimates has now moved on from 2012 to 2013.

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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 1 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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3. Gross fixed capital formation and business investment

Figure 1 shows the level of annual gross fixed capital formation (GFCF) since 1997. GFCF has increased to £308.9 billion in 2015.

Figure 2 shows annual growth of GFCF since 1997. GFCF has increased by 3.3% between 2014 and 2015.

GFCF in Quarter 1 (Jan to Mar) 2016 was £77.1 billion, having decreased by 0.1% when compared with the previous quarter (Figures 3 and 4). Previously GFCF was estimated to be £76.9 billion and to have risen by 0.5%. The fall in Quarter 1 2016 follows a decrease of 1.0% in Quarter 4 (Oct to Dec) 2015, the first consecutive two quarter fall in GFCF since Quarter 3 2012. Prior to Quarter 4 2015, GFCF had increased each quarter since Quarter 2 (Apr to June) 2014. The main contributor to the fall in GFCF in Quarter 1 2016 was a fall in investment in other buildings and structures and transfer costs, down 4.6% on the previous quarter. This is a downward revision compared with the provisional estimate when the same asset fell by 0.7%. The main cause of this revision is the availability of improved estimates of government investment. GFCF increased by 0.7% between Quarter 1 2015 and Quarter 1 2016.

The largest contributor to the fall of GFCF was other buildings and structures and transfer costs. Most of this fall is due to other buildings and structures. Partially offsetting this was private sector costs of ownership transfer on non-produced assets, which was estimated to have grown by 8.4% since Quarter 4 2015. Although the level has been revised down by £0.1 billion compared with the provisional estimate, this is still the highest level of private sector costs of ownership transfer on non-produced assets since Quarter 2 2008. The Bank of England’s latest Summary of Business Conditions suggests this could be owing to the bringing forward of buy-to-let purchases, ahead of the introduction of the rise in Stamp Duty on additional properties in April 2016.

Figure 5 shows the level of annual business investment since 1997. Business investment has increased to £177.1 billion in 2015

Figure 6 shows annual growth of business investment since 1997. Business investment has grown by 5.0% between 2014 and 2015.

The level of business investment in Quarter 1 2016 was £43.7 billion, a fall of 0.6% when compared with the previous quarter and a downward revision from the previously estimated 0.5% fall when business investment was estimated to be £43.1 billion. This takes business investment to its lowest level since Quarter 4 2014 when it was £43.1 billion. Business investment is now 6.7% above the pre-economic downturn peak of Quarter 1 2008 (£40.9 billion).

As illustrated in Figures 7 and 8 there have now been 2 consecutive periods of contraction, quarter on quarter, in business investment. The last time this happened was in Quarter 1 and Quarter 2 2013.

Business investment fell by 0.8% 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 2010, when it fell by 1.0%.

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4. Summary tables

Table 1 shows that in Quarter 1 (Jan to Mar) 2016, the largest increase seen in level terms was in private sector cost of ownership transfer on non-produced assets. This grew by £0.4 billion (8.4%) to £5.7 billion from Quarter 4 (Oct to Dec) 2015. General government saw the largest decrease in level terms, falling £0.3 billion (6.5%) from £11.6 billion in Quarter 4 2015 to £11.3 billion in Quarter 1 2016.

Between Quarter 1 2015 and Quarter 1 2016, private sector cost of ownership transfer on non-produced assets showed the largest level increase, having grown by £1.1 billion (25.1%). Private sector dwellings saw the second-largest level increase having grown £0.8 billion (5.4%) to £15.7 billion.

Table 2 shows that in Quarter 1 2016, the largest increase in level terms was in transport equipment, which grew by £733 million (18.7%) to £4.7 billion from Quarter 4 2015. Other buildings and structures and transfer costs saw the largest decrease in level terms, falling £1.2 billion (4.6%) from £25.1 billion in Quarter 4 2015 to £23.9 billion in Quarter 1 2016.

Between Quarter 1 2015 and Quarter 1 2016, information and communication technology equipment and other machinery and equipment showed the largest level increase, having grown by £0.9 billion (6.2%) to £15.1 billion. Dwellings saw the second-largest level increase, having grown by £0.6 billion (3.8%) to £16.6 billion.

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

Each year in the Blue Book-consistent publications of business investment we incorporate methodological and data changes that will impact on the business investment and GFCF datasets.

This business investment publication is the first to include Blue Book 2016 data. The regular annual changes include:

  • seasonal adjustment reviews
  • moving on the reference year by a year (to 2013)
  • updating annual benchmark data from the Annual Business Survey (ABS) for 2012 and 2013
  • annual supply-use balancing

This year we are also taking the opportunity to correct processing errors identified after Blue Book 2015 as this is our earliest opportunity to do so. These impact on both the dwellings and agricultural estimates within the GFCF and business investment estimates. We have also made improvements to our estimates of own account construction data within GFCF, and improved estimates for Value Added Tax fraud and the exhaustiveness adjustment for concealed income.

As can be seen in Figure 9, the changes to GFCF introduced for Blue Book 2016 have resulted in revisions to annual growth, more noticeable in later years. The largest positive revision to annual growth is in 2012, which has been revised up by 0.8 percentage points (1.5% to 2.3%). The largest negative revisions can be found in 2009 and 2015, which have both been revised down by 0.8 percentage points (in 2009 from -14.4% to -15.2% and in 2015 from 4.1% to 3.3%).

Revisions between 1997 and 2011 are mainly due to the correction of processing errors for the agricultural and dwellings data, along with improvements to the measurement of own account construction of dwellings, details of which can be found in National Accounts articles: Impact of Blue Book 2016 Changes on Current Price Gross Domestic Product Estimates, 1997 to 2011.

Revisions between 2012 and 2014 are affected by revised ABS data.

The data for 2015 have been impacted by the corrections and improvements already outlined, as well as revisions coming from the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS).

Figure 10 shows annual growth of business investment compared with previously published estimates. Business investment is not affected by revisions to dwellings data as dwellings is not an asset included in the business investment breakdown. The largest positive revision to the annual business investment growth is in 2012, where growth has increased from 5.1% to 7.2%. The main driver of this revision is the availability of improved ABS data. The largest negative revision is in 2014, where annual growth has been revised down from 4.7% to 3.9%. Growth in 2015 has also been revised down, from 5.2% to 5.0%, due to the revision of the benchmarked ABS data and revised QCAS data.

Table 3 shows the effect of the revisions to business investment and GFCF on gross domestic product (GDP) growth. The revisions in 2015 have led to GFCF contributing 0.5% to GDP growth compared with 0.7% in our previously published estimate.

Table 4 shows the effect of the revisions to business investment on GFCF growth. The largest revision is in 2012, with the business investment contribution estimated at 4.0 percentage points, 1.2 percentage points higher than our previous estimate. In 2015, the contribution has been revised down by 0.1 percentage points to 2.8 percentage points.

Revisions in this publication are in line with National Accounts revisions policy and declared changes that are part of the Blue Book 16 publication. Revisions occur as far back as data is available, though 1997 onwards is published in this release. To find data prior to 1997, please go to our time series dataset.

More information on these changes can be found in an article released by us on the Impact of Blue Book 2016 changes on current price and chained volume measure Gross Domestic Product and earlier national accounts articles.

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6. Economic background

Comparing gross fixed capital formation (GFCF) between Quarter 1 (Jan to Mar) 2016 and Quarter 1 2015, there was an increase of 0.7%. For 12 consecutive periods there has been growth in each quarter compared with the same quarter of the previous year. However, the size of that growth has slowed since the middle of 2015. In Quarter 1 2016, GFCF contracted by 0.1% when compared with Quarter 4 (Oct to Dec) 2015, following a 1.0% contraction between Quarter 3 (July to Sept) 2015 and Quarter 4 2015.

The fall in GFCF in Quarter 1 2016 was driven by a fall in general government and business investment, which contributed -0.4 and -0.3 percentage points to overall GFCF respectively. Investment in private sector dwellings and private sector cost of ownership transfer on non-produced assets were the only positive contributions to total GFCF in Quarter 1 2016. This coincided with a 20% increase in residential transactions, preceding the pre-announced change in stamp duty on additional properties in April 2016 (Bank of England’s Inflation Report).

Comparing Quarter 1 2016 with the previous quarter, business investment contracted by 0.6% following a 2.2% contraction between Quarter 3 2015 and Quarter 4 2015. This movement in business investment in the latest quarter has led to a reduction in its share of GFCF to 56.6%, its lowest share since Quarter 3 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, our data shows that investment in “other production” (which includes mining and quarrying) fell when compared with 2014. This fall coincided with a 41.6% fall in oil prices over 2015.

Movements in business investment can sometimes be explained by lending conditions, found in the BoE’s Inflation Report, which highlights the state of lending conditions in the recent period. The fall in loans was due to decreasing demand rather than a contraction in supply. There has been a 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 2010.

By asset the contraction in GFCF was driven by other buildings and structures and transfer costs, which contributed -1.5 percentage points to the decrease. In contrast, transport equipment investment had a positive contribution to GFCF and grew by 18.7% in Quarter 1 2016.

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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. For enquiries about user-requested data email 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 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, a bias adjustment was introduced to GFCF and its components in the revised estimate. A bias adjustment of £0.6 billion has been included in the revised (month 3) 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 revised in the Quarter 2 (Apr to June) 2016 revised release.

To try and improve the quality of the response from our respondents, 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 NCW at the expense of OCE. 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 2015, Quarter 3 2015, Quarter 4 (Oct to Dec) 2015 and Quarter 1 2016. These adjustments are shown in Table 5.

Survey response rates

Table 6 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 2016 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 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 1 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 us in the compilation of the UK National Accounts, and by the Bank of England and HM 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, 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 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.

Changes to the Quarterly Survey of Capital Expenditure and methodological information

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, which provides international guidance for national accounts.

The main changes to the survey were:

  • 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.

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. 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.

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

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. Accessing data

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

7. 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