Business investment in the UK: October to December 2015 revised results

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

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This is an accredited national statistic.

Contact:
Email Alison Mccrae

Release date:
31 March 2016

Next release:
26 May 2016

1. Main points

Gross fixed capital formation (GFCF) in volume terms was estimated to have fallen by 1.1% to £76.6 billion between Quarter 3 (July to Sept) 2015 and Quarter 4 (Oct to Dec) 2015.

Between Quarter 3 2015 and Quarter 4 2015, business investment in volume terms was estimated to have decreased by 2.0 % to £43.3 billion.

Between Quarter 4 2014 and Quarter 4 2015, GFCF was estimated to have increased by 2.1% from £75.0 billion to £76.6 billion.

Business investment was estimated to have risen by 3.0% between Quarter 4 2014 and Quarter 4 2015, increasing from £42.1 billion to £43.3 billion.

Business investment increased by 5.2% between 2014 and 2015, having increased by £8.7 billion to £174.5 billion.

The earliest period being revised in this release is Quarter 1 (Jan to Mar) 2015.

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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

Business investment in Quarter 4 (Oct to Dec) 2015 fell by 2.0% to £43.3 billion when compared with Quarter 3 (July to Sept) 2015 (Figure 4). This fall follows consecutive periods of growth of 2.9% in Quarter 1 (Jan to Mar) 2015, 0.7% in Quarter 2 (Apr to June) 2015 and 1.3% in Quarter 3 (July to Sept) 2015 and takes business investment back to the level recorded in Quarter 1 (Jan to Mar) 2015. The fall in Quarter 4 (Oct to Dec) 2015 is the first since Quarter 4 (Oct to Dec) 2014 when business investment fell by 0.1%. The fall in business investment in the latest quarter was driven by a larger volume of asset disposals compared with previous quarters, particularly in transport.

Between Quarter 4 (Oct to Dec) 2014 and Quarter 4 (Oct to Dec) 2015, business investment increased by 3.0%. There has not been a quarter on same quarter of previous year fall in business investment since Quarter 1 (Jan to Mar) 2013, when it fell by 1.8%.

Between 2014 and 2015, business investment increased by 5.2% having increased by 4.7% between 2013 and 2014.

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5. Summary tables

Table 1a shows that in Quarter 4 (Oct to Dec) 2015, gross fixed capital formation decreased by an estimated 1.1% to £76.6 billion, compared with Quarter 3 (July to Sept) 2015. Business investment and general government contributed most to the fall from Quarter 3 (July to Sept) 2015. The decreases were partially offset by increases in private sector cost of ownership transfer on non-produced assets and private sector dwellings.

Between Quarter 4 2014 and Quarter 4 2015, general government was the only sector to have decreased, having fallen by 5.2%, the largest fall since Quarter 2 2013 when general government decreased by 9.6%.

Table 1b shows that in Quarter 4 (Oct to Dec) 2015, other buildings and structures and transfer costs saw the largest decrease in level terms, falling £0.4 billion (1.7%) to £24.2 billion from Quarter 3 (July to Sept) 2015. The largest increase in level terms in Quarter 4 (Oct to Dec) 2015 was in dwellings, which grew by £0.3 billion (1.5%) to £16.9 billion from Quarter 3 (July to Sept) 2015.

Between Quarter 4 (Oct to Dec) 2014 and Quarter 4 (Oct to Dec) 2015, transport equipment increased the most, having grown by 38.5% (£0.9 billion). This was partially offset by falls in other buildings and structures and transfer costs (£0.3 billion) and intellectual property products (£0.1 billion).

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6. Economic background

Gross fixed capital formation (GFCF) fell in the final quarter of 2015, by 1.1% compared with the previous quarter. However, this follows a period of 10 consecutive quarters of investment growth, and the level of investment is now estimated to be 2.1% higher compared with Quarter 4 2014. This rate of ”quarter on year” growth has slowed in recent quarters. It was 8.6% in Quarter 2 (Apr to June) 2014 and has now fallen below the average rate of 3.2% achieved in the decade prior to the economic downturn - Quarter 1 (Jan to Mar) 1998 to Quarter 4 2007.

Business investment contracted by 2.0% in Quarter 4 2015 when compared with the previous quarter, a faster rate than the fall in total GFCF. This is the lowest growth rate since Quarter 1 2014, however, the level of business investment remains 4.8% above pre-downturn peak levels Quarter 1 2008. The Bank of England’s (BoE) Inflation Report highlights that a portion of this weaker performance could be attributed to a fall in investment in the oil extraction industry, which has coincided with a sharp fall in oil prices over this period.

Dwellings investment – which relates to the new construction and repair of residential homes – helped to offset partially the weakness in business investment by growing 1.5% on the quarter and by 4.1% on the same quarter of the previous year. The BoE Inflation Report cites a pickup in mortgage approvals and the continuation of low borrowing rates as factors assisting the demand side for housing, while the easing in the shortage of building materials according to the latest RICS construction market survey is assisting from a supply perspective.

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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 £0.4 billion was included in the revised (month 3) release for Quarter 4 (Oct to Dec) 2015, revised down from the provisional (month 2) release when the bias adjustment was £1.2 billion. This adjustment will be reassessed in line with previous revisions and will be updated when Quarter 4 (Oct to Dec) 2015 is next open for revision.

The Quarterly Survey of Capital Expenditure was improved by adding clearer instructions. As detailed in the provisional Quarter 1 (Jan to Mar) 2015 Business Investment release, feedback from some respondents indicated that they had been misreporting their asset breakdown and were correcting this on the new questionnaire. We found that some respondents were reporting new construction work (NCW) as other capital equipment (OCE). From Quarter 1 (Jan to Mar) 2015 respondents to the survey are now reporting more in new construction work at the expense of other capital equipment. To remain consistent with the previous data, we have made some adjustments to the assets in the current price series in Quarter 1 (Jan to Mar), Quarter 2 (Apr to June), Quarter 3 (July to Sept) and Quarter 4 (Oct to Dec) 2015. These adjustments are given in table 2.

Revisions

Data in this release have been revised from Quarter 1 (Jan to Mar) 2015 to Quarter 4 (Oct to Dec) 2015 in line with National Accounts revisions policy.

The main drivers of revisions to GFCF since the Quarter 4 (Oct to Dec) 2015 provisional release are revisions to general government data and data relating to dwellings.

Business investment revisions are primarily caused by the improved Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) response rate, as can be seen in table 3. The larger percentage of returns at revised mean that we have an improved picture of investment in the economy.

Revisions can be found at the end of the G1 – G16 tables which accompany this release.

Survey response rates

Table 3 presents the revised (month 3, third estimate of GDP) response rates for the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS). The estimates in this release are based on the Quarter 4 (Oct to Dec) 2015 month 3 (revised) survey results.

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9 .Background notes

1. Understanding the data

Short guide to business investment

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

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

Interpreting the data

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

Use of the data

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

2. Forthcoming changes for the Blue Book 2016 publication

Blue Book 2016 changes

  1. 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 traud,

  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 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.

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.

Additionally, an error has been identified during further quality assurance of the GFCF dataset published as part of our annual Blue Book publication on 30 September 2015. The affected series are NPEL, L636, NPQT, DLWL, DLWO, DLWT, NPEN, L62K, NPQR, DLWJ, DLWM, DLWQ, NPEK, L62T, NPQS, TLPX, TLPW, EQED, NPEM, L5ZQ, NPQX, DLWZ, DLXI, EQEC and their associated growth rate series. Higher level aggregates, including GDP, are also affected. These will be corrected as part of the annual Blue Book 2016 publication.

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 reference tables.

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.

Aircraft imports

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

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

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

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