Business investment in the UK: April to June 2018 revised results

• Gross fixed capital formation (GFCF), in volume terms, was estimated to have fallen by 0.5% to £85.2 billion in Quarter 2 (Apr to June) 2018 from £85.6 billion in Quarter 1 (Jan to Mar) 2018.

• Business investment was estimated to have fallen by 0.7% to £47.5 billion between Quarter 1 2018 and Quarter 2 2018.

• Between Quarter 2 2017 and Quarter 2 2018, GFCF was estimated to have fallen by 0.6% from £85.8 billion; business investment was estimated to have fallen by 0.2% from £47.6 billion.

• The sectors that contributed to the 0.5% GFCF fall between Quarter 1 2018 and Quarter 2 2018 were public corporations’ dwellings, business investment and private sector transfer costs.

• The asset that contributed most to the decrease in GFCF over the same period was transport equipment.

The estimates in this release are short-term indicators of investment in non-financial assets in the UK, such as dwellings (residential buildings), transport equipment (planes, trains and automobiles), machinery (electrical equipment), buildings (non-residential buildings and roads) and intellectual property products (assets without physical properties – formerly known as intangibles). This release covers not only business investment, but asset and sector breakdowns of total gross fixed capital formation (GFCF), of which business investment is one component.

Business investment is net investment by private and public corporations. These include investments in transport, information and communication technology (ICT) equipment, other machinery and equipment, cultivated assets (such as livestock and vineyards), intellectual property products (IPP, which includes investment in software, research and development, artistic originals and mineral exploration), and other buildings and structures.

Business investment does not include investment by central or local government, investment in dwellings, or the costs associated with the transfer of non-produced assets (such as land). Business investment is not an internationally recognised concept and it should not be used to make international comparisons, however, GFCF is an internationally recognised standard and is therefore internationally comparable. Please see A short guide to GFCF and business investment for more detailed information, including asset and sector hierarchies.

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

The Business investment QMI was updated in January 2018 and includes updated information on the quality and methodology used in the production of business investment statistics.

Between Quarter 1 (Jan to Mar) 2018 and Quarter 2 (Apr to June) 2018, gross fixed capital formation (GFCF) fell by 0.5%, following a fall of 1.0% in Quarter 1 2018. The last time GFCF fell in two consecutive quarters was Quarter 2 2012 and Quarter 3 (July to Sept) 2012.

On a sector basis, the largest negative contribution came from public corporations’ dwellings, which contributed negative 0.6 percentage points. Business investment and private sector transfer costs contributed negative 0.4 and negative 0.3 percentage points respectively. This follows contributions to growth of negative 0.3 percentage points each from business investment and public corporations’ dwellings in Quarter 1 2018. Private sector dwellings and general government made positive contributions of 0.5 and 0.2 percentage points respectively (Figure 1).

Between Quarter 2 2017 and Quarter 2 2018, GFCF decreased by 0.6%. The large rise and counterbalancing fall in private and public dwellings respectively was largely due to the reclassification of English housing associations from the public corporations sector to the private non-financial corporations sector. General government also contributed negatively, contributing negative 0.8 percentage points.

Three of the five gross fixed capital formation (GFCF) assets fell in Quarter 2 (Apr to June) 2018, contributing to the 0.5% decrease between Quarter 1 (Jan to Mar) 2018 and Quarter 2 2018. The largest of these was transport equipment, which contributed negative 0.8 percentage points (Figure 2).

Although GFCF fell for the second quarter in a row, the assets behind the declines were largely different, with other buildings and structures along with information and communication technology (ICT) and other machinery and equipment the assets behind the fall in Quarter 1 2018. Although it was the biggest contributor to the fall in Quarter 2 2018, transport equipment previously made the largest positive contribution to growth in Quarter 1 2018. This followed contributions of negative 0.7 percentage points in both of the previous two quarters (Quarters 3 (July to Sept) and 4 (Oct to Dec) 2017).

Transport equipment has made a negative contribution to GFCF growth compared to the same quarter of the previous year in each of the previous four quarters, the first time this has happened since Quarter 1 to Quarter 4 (Oct to Dec) 2011.

Intellectual property products (IPP) provided the only positive contribution at 0.4 percentage points; its fifth consecutive quarter of growth. Compared with the same quarter of the previous year, IPP grew by 8.3%. This was the highest rate since Quarter 2 2007 when it grew 9.0% compared with Quarter 2 2006.

In relative terms, investment in IPP did not fall as much as total GFCF during the economic downturn, but since then total GFCF has grown more strongly on average. Since Quarter 1 2017, GFCF in IPP has increased by 10.5%. In comparison, in Quarter 4 (Oct to Dec) 2016 GFCF in IPP was 11.1% higher than in Quarter 2 2009, the trough of the economic downturn (Figure 3).

Between Quarter 2 2017 and Quarter 2 2018, the largest contributions to the 0.6% GFCF decrease came from:

• transport equipment, which contributed negative 1.6 percentage points

• other buildings and structures and transfer costs, which contributed negative 0.8 percentage points

• ICT equipment and other machinery and equipment, which contributed negative 0.3 percentage points

Intellectual property products and dwellings partially offset the falls in the other assets, contributing 1.5 and 0.6 percentage points respectively.

Gross fixed capital formation (GFCF) is now 10.5% above the UK economy’s pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008 and 33.6% above the level seen at the trough of the downturn in Quarter 2 (Apr to June) 2009 (Figure 4).

Over the last 10 years GFCF has grown at a compound average growth rate of 0.2% per quarter, however this increases to 0.8% if the economic downturn is excluded and the rate is calculated for the period Quarter 3 (July to Sept) 2009 to Quarter 2 2018. In comparison, the compound average growth rate of GFCF for the 10 years prior to the economic downturn was 0.6% per quarter.

Developments in the housing market can be an important indicator of investment and wider activity in the economy. The estimates in this publication incorporate data consistent with Construction output in Great Britain: July 2018 and new orders April to June 2018, published on 10 September 2018. The Construction output in Great Britain bulletin shows construction increased by 0.9% in the three months to June 2018. The decrease in the construction of private housing contrasts with the private sector dwellings series for gross fixed capital formation (GFCF), which increased in Quarter 1 (Jan to Mar) 2018. However, this contrast is due largely to conceptual and methodological differences. More information about these can be found in the article Conceptual differences between an aggregate of construction output measures and the GFCF dwellings measure, published in June 2013.

Investment in transport equipment has been broadly declining from its record level in Quarter 3 (July to Sept) 2016 despite being an historically volatile series. This can also be seen in the imports of machinery and transport equipment, which has also fallen since Quarter 1 2017. Data on UK imports and exports can be found in UK trade: goods and services publication tables.

Business investment fell by 0.7% between Quarter 1 (Jan to Mar) 2018 and Quarter 2 (Apr to June) 2018, following a fall of 0.5% between Quarter 4 (Oct to Dec) 2017 and Quarter 1 2018. The assets behind the latest fall are broadly in line with those driving the fall in gross fixed capital formation (GFCF), with transport equipment making the largest negative contribution of negative 1.5 percentage points (Figure 5). Growth in intellectual property products along with a small increase in information and communication technology (ICT) equipment and other machinery and equipment was not enough to offset the falls in transport equipment and other buildings and structures.

The falls in business investment in Quarter 1 (Jan to Mar) 2018 and Quarter 2 (Apr to June) 2018 follows three consecutive quarter-on-quarter increases in 2017.

Growth for business investment on a quarter on same quarter a year ago basis was negative for the first time since Quarter 4 (Oct to Dec) 2016. Since then, and before the latest quarter, business investment had been growing at an average rate of 1.9% compared to the previous year’s quarter.

Business investment is now 13.2% above the pre-economic downturn peak of Quarter 1 2008 and 36.9% above the level seen at the lowest point of the economic downturn.

Over the last 10 years, business investment has grown at a compound average growth rate of 0.2%, however if the economic downturn is excluded this increases to 0.9%. In comparison, in the 10 years prior to the economic downturn, business investment grew at a compound average rate of 0.3%.

The Bank of England, in its most recent Agents’ summary of business conditions (PDF, 99.5 KB), stated that investment intentions had “remained modestly positive among manufacturers and in business services”. It is also noted that some manufacturers were expanding capacity to meet export demands, as well as investing in automation to counter rising labour costs. Consumer service investment intentions, in contrast, “remained weak”.

The Bank also found that “Brexit uncertainty was weighing down discretionary or expansionary investment for some medium- to larger-sized businesses, or those with a greater international focus”.

The Bank of England also noted in its May 2018 Inflation Report that the boost in net trade over the past 18 months should positively impact on business investment, as exporters and those in the supply chain are encouraged to invest as a result.

Another important factor to consider when looking at business investment is the availability or supply of credit. Although the increase in Bank Rate in November 2017 to 0.5% pushed up the cost of borrowing, the cost of borrowing to firms remains low. The further rate rise to 0.75% in August 2018 occurred in Quarter 3 (July to Sept) 2018 so did not affect the data reported on in this bulletin. The Bank of England’s Credit Conditions survey reported a “significant increase in demand for corporate lending from small businesses” in Quarter 2 (Apr to June) 2018. However, demand from medium-sized private non-financial corporations (PNFCs) was unchanged and demand from large PNFCs “decreased slightly”.

In Quarter 2 (Apr to June) 2018, Italy had the strongest quarter-on-quarter growth in gross fixed capital formation (GFCF) of any G7 nation at 2.9%, followed by Japan at 1.7%. This contrasts with a 0.5% fall in GFCF for the UK. All other G7 countries experienced growth in GFCF (Figure 7).

Italy also had the strongest quarter on same quarter a year ago growth at 6.2%. The next largest quarter on same quarter a year ago growths were seen in the United States of America (USA), where GFCF grew by 5.1%. The UK was the only country to experience a fall, with GFCF in Japan growing the slowest of the rest of the G7 at 1.9%.

Average quarterly growth in GFCF for the UK has been 0.5% since 2015 with GFCF for Italy increasing by 0.9% on average, followed by the USA and France each increasing by 0.8% on average, whilst GFCF for Germany grew by 0.7% on average in the same period.

Since 2015, average quarter on same quarter a year ago growth for the UK has been 2.6% with only Japan (1.8%) and Canada (negative 0.8%) having lower average growth rates over this period.

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

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

Revisions have been made to gross fixed capital formation (GFCF) and business investment back to Quarter 1 (Jan to Mar) 2017 due to taking on revised source data for 2017 and Quarter 1 and Quarter 2 (Apr to June) 2018, in addition to revisions due to seasonal adjustment.

The 1.3 percentage points Quarter 2 2018 downward revision to GFCF growth was mainly due to the incorporation of improved estimates from central government departments and local government, as well as improved data from the Quarterly Acquisitions and disposals of Capital Assets (QCAS) survey (Figure 8).

Including this data led to a downwards revision in Quarter 2 2018 to total GFCF, mainly in the information and communication technology (ICT) equipment and other machinery and equipment asset. The addition of these new data also led to a downward revision to other buildings and structures and transfer costs and intellectual property products (IPP). These downward revisions were partially offset by upward revisions to transport equipment and dwellings. On a sector basis, the downward revisions to Quarter 2 2018 were mostly due to general government and business investment.

Revisions to GFCF in 2017 were mainly due to dwellings being affected by the revisions to construction output as a result of the improved methodology which took effect in June 2018. For more information please see the article on the impact of improvements to construction statistics: June 2018.

The 1.2 percentage points downward revision to business investment growth in Quarter 2 2018 was due mainly to downward revisions from later data for other machinery and equipment and to a lesser extent, buildings. Transport equipment was subject to a positive revision but only enough to lessen the total downward revision to business investment. These revisions were mainly due to later data from the QCAS survey.

Other machinery and equipment was also revised down in Quarter 1 2018, however transport equipment and IPP were subject to upward revisions, particularly IPP, leading to a positive revision to business investment overall (Figure 9).

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:

• Profitability of UK companies – quarterly data on capital employed by private non-financial corporations (PNFCs); contains annual, net and gross rates of return (expressed as percentages) on capital used by PNFCs

• Quarterly national accounts – includes UK data on GFCF and changes in inventories

• UK Economic Accounts – quarterly detailed estimates of national product, income and expenditure, UK Sector Accounts and UK Balance of Payments, including data on GFCF

• UK National Accounts, The Blue Book – annual publication of the UK National Accounts, including data on GFCF

The Business investment Quality and Methodology Information (QMI) report contains important information on:

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

• uses and users

• how the output was created

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

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

Adjustments

Large capital expenditure tends to be reported later in the data collection period than smaller capital expenditure. This means that larger expenditures are often included in the revised (month 3) results, but are not reported in time for the provisional (month 2) results, leading to a tendency towards upward revisions in the later estimates for business investment and gross fixed capital formation (GFCF). Following investigation of the impact of this effect, from Quarter 3 (July to Sept) 2013, in the provisional estimate a bias adjustment is introduced to business investment and its components. The bias adjustment has been removed in this revised release.

Survey response rates

Table 2 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 2 (Apr to June) 2018 revised survey results.