Business investment in the UK: April to June 2019 revised results

• Business investment, in volume terms, was estimated to have fallen by 0.4% to £49.2 billion between Quarter 1 (Jan to Mar) 2019 and Quarter 2 (Apr to June) 2019; this follows a 0.8% increase in Quarter 1 2019, the first quarter-on-quarter increase in business investment since Quarter 4 (Oct to Dec) 2017.

• Gross fixed capital formation (GFCF), in volume terms, was estimated to have fallen by 0.9% to £87.2 billion between Quarter 1 2019 and Quarter 2 2019.

• Between Quarter 2 2018 and Quarter 2 2019, business investment was estimated to have fallen by 1.4% from £49.9 billion; GFCF was estimated to have increased by 0.3% in the same period from £87.0 billion.

• The asset that contributed most to the fall in business investment between Quarter 1 2019 and Quarter 2 2019 was information and communication technology (ICT) equipment and other machinery and equipment.

• The largest negative contribution to the 0.9% GFCF decrease between Quarter 1 2019 and Quarter 2 2019, on a sector basis, came from general government, with business investment also contributing negatively; the asset that contributed most to the fall was ICT equipment and other machinery and equipment.

• Estimates in this bulletin are consistent with the UK National Accounts, The Blue Book 2019 edition to be published on 31 October 2019; all data have been revised from their start point; the reference year for the chained volume estimates in this bulletin remains as 2016.

Blue Book 2019

Each year we produce an annual update to the UK National Accounts in the Blue Book and associated releases. This release and accompanying datasets are consistent with changes made as part of Blue Book 2019. Details have already been provided on the impact of these changes up to 2016 in the article National Accounts articles: Impact of Blue Book 2019 changes on gross fixed capital formation and business investment.

This year, because of the very demanding set of changes being put through in the annual update, we have exceptionally not fully reconciled 2017 annual gross domestic product (GDP) data, instead producing an indicative balance to allow further time for final quality assurance of the data. Consequently, the reference year and last base year for all chained volume measure series remain as 2016.

For more information on the improvements and changes to gross fixed capital formation (GFCF) and business investment introduced in this Blue Book 2019-consistent publication, please see Section 13 of this bulletin.

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)

• 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 Quality and Methodology Information includes information on the quality and methodology used in the production of business investment statistics.

International Financial Reporting Standards (IFRS16)

In January 2019, a new reporting standard took effect for those businesses using accountancy framework International Financial Reporting Standards (IFRS). IFRS16 Leases brings the reporting of operating leases onto balance sheets. This has impacted how some businesses have reported on their fixed assets, mainly through our Quarterly Acquisition and Disposal of Capital Assets Survey (QCAS), used in the compilation of gross fixed capital formation (GFCF) and business investment.

While we recognise there is a change to the accounting standards for some businesses this quarter, there has been no change to national accounts standards on the treatment of leases as we need to be consistent with the European System of Accounts (ESA10), which specifies that operating leases should be excluded.

To assess the impact of IFRS16’s introduction on GFCF and business investment estimates, we contacted QCAS respondents with large movements in their data to ask them which accountancy framework they used and, if using the IFRS framework, what if any impact IFRS16 has had on their data for Quarter 1 (Jan to Mar) 2019 and Quarter 2 (Apr to June) 2019.

As a result, we have made an adjustment of approximately negative £244 million and negative £133 million in Quarter 1 2019 and Quarter 2 2019 respectively, to remove the quantified impact of its introduction and better reflect underlying growth for GFCF and business investment. This adjustment has been applied mainly to reflect the impact on generally larger companies. The asset most affected by the introduction of IFRS16 in Quarter 1 2019 was ICT equipment and other machinery and equipment. In Quarter 2 2019 the asset most affected was intellectual property products.

We will continue to adjust for IFRS16’s impact in the future because of the inclusion of operating leases being contrary to the requirements of ESA10.

Between Quarter 1 (Jan to Mar) 2019 and Quarter 2 (Apr to June) 2019, gross fixed capital formation (GFCF) decreased by 0.9%, the largest fall since Quarter 1 2018, when GFCF also decreased by 0.9% compared with Quarter 4 (Oct to Dec) 2017.

On a sector basis, the largest negative contribution came from general government, which contributed negative 0.6 percentage points. The general government decrease in the latest quarter was because of decreased investment across a number of central government departments. Business investment contributed negative 0.2 percentage points, while private sector dwellings and private sector transfer costs both contributed negative 0.1 percentage points (Figure 1). Note that contributions may not sum to total growth because of rounding.

Between Quarter 2 2018 and Quarter 2 2019, GFCF increased by 0.3%. General government made the largest positive contribution, contributing 0.9 percentage points. This was partially offset by business investment, which contributed negative 0.8 percentage points for the same period.

Information and communication technology (ICT) equipment and other machinery and equipment, together with intellectual property products, contributed negative 2.6 and negative 0.3 percentage points respectively to the 0.9% decrease in gross fixed capital formation (GFCF) between Quarter 1 (Jan to Mar) 2019 and Quarter 2 (Apr to June) 2019.

ICT equipment and other machinery and equipment fell by 15.0% compared with Quarter 1 2019. This was because of data from the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) and from central government. The only time this asset has experienced a larger fall was Quarter 3 (July to Sept) 2000, when growth was negative 22.5% following a large increase in Quarter 2 2000 of 25.7%.

Transport equipment, and other buildings and structures and transfer costs made positive contributions of 1.2 and 0.7 percentage points respectively to GFCF growth (Figure 2). The 30.1% increase in transport equipment, the largest since Quarter 4 2015, is largely reflected in our survey data.

Between Quarter 2 2018 and Quarter 2 2019, the largest contribution to the 0.3% GFCF increase came from other buildings and structures and transfer costs, which contributed 2.4 percentage points. Transport equipment contributed 0.6 percentage points. These increases were offset partially by a fall in ICT equipment and other machinery and equipment, which contributed negative 2.8 percentage points.

Developments in the housing market can be an important indicator of investment and wider activity in the economy. Construction output in Great Britain: July 2019 and new orders April to June 2019, published 9 September 2019, shows that the decrease in construction work in the three months to June 2019 was mostly because of the all repair and maintenance series.

It should be noted that these estimates have been revised as part of Blue Book 2019 and as such may not be consistent with construction data used in this gross fixed capital formation (GFCF) dataset. Estimates of Construction output in Great Britain will be updated on 10 October 2019.

While there are some differences between estimates for the construction of private housing and the private sector dwellings series for GFCF, these are largely because of conceptual and methodological differences. More information about these can be found in the recent article Conceptual and methodological differences between private housing construction output and gross fixed capital formation private sector dwellings published 31 May 2019.

Business investment fell by 0.4% between Quarter 1 (Jan to Mar) 2019 and Quarter 2 (Apr to June) 2019, following an increase of 0.8% in Quarter 1 2019, which marked the only positive growth since Quarter 4 (Oct to Dec) 2017.

Figure 3 shows that information and communication technology (ICT) equipment and other machinery and equipment contributed most to the decrease between Quarter 1 2019 and Quarter 2 2019, at negative 2.9 percentage points. The last time this asset made a positive contribution to business investment growth was Quarter 2 2017. Intellectual property products (IPP) also contributed to the fall in business investment, at negative 0.3 percentage points. These decreases were offset partially by positive contributions from transport equipment, and other buildings and structures, which contributed 2.2 and 0.6 percentage points respectively.

Business investment fell by 1.4% in Quarter 2 2019 compared with Quarter 2 2018. This is the fifth consecutive quarter where business investment has fallen compared with the same quarter of the previous year.

ICT equipment and other machinery and equipment made the biggest contribution to the 1.4% fall in business investment between Quarter 2 2018 and Quarter 2 2019, contributing negative 5.7 percentage points, with other machinery in particular contributing most to the decrease in this asset. The last time this asset contributed more negatively to business investment growth was Quarter 4 2009.

Business investment growth in Quarter 2 2019 was constrained by IPP, contributing negative 0.2 percentage points. Other buildings and structures, and transport equipment partially offset these falls, contributing 3.4 and 1.0 percentage points respectively. The last time transport equipment made a positive contribution to business investment compared with the same quarter of the previous year was Quarter 4 2016.

The falls in business investment for Quarter 1 (Jan to Mar) 2018 through to Quarter 4 (Oct to Dec) 2018 followed four consecutive quarter-on-quarter increases in 2017. Figure 4 shows that, following the fall in business investment during the economic downturn of Quarter 1 2008 to Quarter 2 2009, there was a period of strong, albeit volatile growth before 2015. Growth in business investment was more moderate from 2017, before falling in each quarter of 2018.

The large increase in business investment in Quarter 2 (Apr to June) 2005 relates to the fact that 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. More information about this can be found in Section 6 of the background notes in the Business investment in the UK: October to December 2016 revised results statistical bulletin.

Business investment is now 0.4% above the level seen in Quarter 2 2016, the quarter in which the EU referendum took place, and has decreased by 1.1% since Quarter 3 (July to Sept) 2016, the quarter following the EU referendum. Information and communication technology (ICT) equipment and other machinery and equipment, and transport equipment were the assets that contributed negatively to growth over these periods.

Figure 5 shows contributions to quarter-on-quarter business investment growth since Quarter 2 2017. While there is no single asset driving the slowdown in business investment over the past two years, ICT equipment and other machinery and equipment made the largest negative contributions to business investment growth in this period.

In the first half of 2019, ICT equipment and other machinery and equipment contributed an average of negative 2.5 percentage points per quarter to business investment growth, compared with negative 0.3 percentage points per quarter in 2018. Since Quarter 2 2017, business investment growth has averaged negative 0.2% per quarter and this asset made an average contribution of negative 0.7 percentage points.

Transport equipment was the other main contributor to the overall slowdown over this period, contributing an average of negative 0.2 percentage points, with recent falls in this asset largely because of decreased aircraft investment. The recent weakness in transport investment continued into Quarter 1 2019 before the large positive contribution to growth in Quarter 2 2019. Further analysis can be found in the article Business investment in the UK: analysis by asset, published 29 March 2019.

The Bank of England, in its Agents’ summary of business conditions for Quarter 2 (Apr to June) 2019, stated that “investment intentions weakened, as Brexit-related uncertainty weighed on sentiment, particularly among exporters”, with the Agents’ score for investment intentions remaining at a nine-year low in June 2019.

In its’ August Inflation Report, the Bank of England notes that there is currently limited spare capacity in the economy, with accommodative credit conditions, which would be expected to support spending.

In the same Inflation Report, the Bank of England highlights that weaker global growth has led to slower business investment growth across the G7 economies, however, “this is unlikely to fully explain the marked weakness in UK investment”. Housing investment also remains subdued, with the Bank of England citing increased uncertainty about the outlook for the housing market.

Each year in the Blue Book-consistent publications of business investment, we incorporate methodological and data improvements that will impact on the business investment and gross fixed capital formation (GFCF) datasets (data are also subject to change as part of the annual supply and use, and gross domestic product (GDP) balancing processes). Revisions are therefore taken on, where applicable, back to the beginning of each dataset in line with National Accounts Revisions Policy.

Revisions for Blue Book 2019 are mainly because of:

• current price improvements to data sources

• regular current price data source updates

• chained volume measure (CVM) methodological improvements

Revisions for 1997 to 2016

Detailed explanations of these data and methodological improvements together with the resulting revisions for 1997 through to 2016 can be found in the article Impact of Blue Book 2019 changes on gross fixed capital formation and business investment, published 20 August 2019.

GFCF has been revised on average by 0.0 percentage points between 1997 and 2016, with revisions ranging between negative 4.3 percentage points and positive 4.6 percentage points. The average revision to business investment over this period was also 0.0 percentage points, with revisions ranging between negative 5.0 percentage points and positive 4.6 percentage points.

Revisions by sector and asset for GFCF can be found in the revisions section of the GFCF by sector and asset datasets accompanying this release.

Revisions for Quarter 1 2017 to Quarter 2 2019

GFCF has been revised on average by negative 0.2 percentage points between Quarter 1 2017 and Quarter 2 2019, with revisions ranging between negative 1.0 and positive 0.5 percentage points (Figure 6). Over the same period business investment has been revised on average by 0.1 percentage points, with revisions ranging between negative 0.7 percentage points and positive 2.5 percentage points.

On average, intellectual property products (IPP) was the largest positive contributor to revisions in this period, while information and communication technology (ICT) equipment and other machinery and equipment was the largest negative contributor.

These assets have been impacted by a number of Blue Book 2019 improvements, the first being that the improved GFCF product allocation introduced as part of the GFCF estimation system improvements implemented in February 2017 is now used in the supply and use balancing process for the first time, enabling GFCF to be balanced in volume terms. This permits thorough reconciliation of GFCF with other transactions in the economy and provides consistency between price types and the Classification of Products by Activity (CPA). It also ensures that price indices implicit in the industry by asset and by sector data are specific to the types of capital good used by the institutional units engaged in that activity.

Data from the Annual Business Survey (ABS) are used each year to create annual benchmarks for investment by many industries. Benchmarks previously used for 2015 and 2016 have been revised in line with usual practice, while data for 2017 have been used for the first time replacing the previously forecast data. This has led to an upward revision to the level of GFCF in 2017. As 2018 data are not yet available, benchmarks are forecasted for 2018 and subsequent years. These benchmark changes have impacted other buildings and structures and transfer costs, and ICT equipment and other machinery and equipment also.

Additionally, improvements to the conversion of capital expenditure and ABS data from Standard Industrial Classification (SIC) 2003 to a SIC 2007 basis using information from historical supply and use tables has affected these assets particularly.

Converting data collected by our business surveys before 2008 was necessary because in Blue Book 2011, we began to present the UK National Accounts on Standard Industrial Classification (SIC) 2007 instead of the previous SIC 2003 basis. To present our accounts on a consistent basis, we needed to apportion data on the old basis to the new basis.

Table 2 shows a summary of the revisions to GFCF and business investment between Quarter 1 2017 and Quarter 2 2019.

Quarter 1 2017

The downward revision to GFCF growth was primarily because of negative revisions to other buildings and structures, and slightly offset by ICT equipment and other machinery and equipment. Both assets have been impacted by the new ABS data, the new product allocation and improvements to the SIC conversion.

Some of the difference between the revision to GFCF and business investment can be explained by the inclusion of transfer costs within GFCF but not business investment, transfer costs having been particularly affected by the supply and use balancing process.

Quarter 2 2017

The downward revisions to GFCF and business investment growth in Quarter 2 2017 were primarily because of other buildings and structures and transfer costs. This was slightly offset by upward revisions to growth from ICT equipment and other machinery and equipment, and transport equipment. These assets were affected by the improved product allocation, new ABS data and the improved SIC conversion.

Quarter 3 2017

The downward revisions to GFCF and business investment growth in Quarter 3 2017 were because of revisions to ICT equipment and other machinery and equipment but were partially offset by positive revisions to transport equipment. Both assets were affected by the improved product allocation, new ABS data and the improved SIC conversion.

Quarter 4 2017

The upward revision to GFCF growth in Quarter 4 2017 was because of upward revisions to dwellings, and other buildings and structures and transfer costs. Business investment was revised downwards because of ICT equipment and other machinery and equipment. Dwellings was affected by updated construction output data, while other buildings and structures and transfer costs, and ICT equipment and other machinery and equipment were affected by the improved product allocation, new ABS data and the improved SIC conversion.

Quarter 1 2018

Downward revisions for GFCF and business investment in Quarter 1 2018 were largely because of transport equipment, and other buildings and structures and transfer costs. Both assets were affected by the improved product allocation, new ABS data for 2017 and the improved SIC conversion.

Quarter 2 2018

The upward revision to GFCF growth was largely because of positive revisions to intellectual property products, primarily as a result of improved estimates of software and databases, and research and development.

Business investment has been revised downwards. The different directions of GFCF and business investment revisions are because of government investment in buildings being revised upwards, while business investment in buildings was revised downwards because of the improved product allocation and the improved SIC conversion.

Quarter 3 2018

GFCF growth was revised downwards because of dwellings, and other buildings and structures and transfer costs. Dwellings was revised because of updated construction output data, while other buildings and structures and transfer costs was affected by the improved product allocation and the improved SIC conversion. Other buildings and structures was the reason for the downward revision to business investment.

Quarter 4 2018

Dwellings, transport equipment, and ICT equipment and other machinery and equipment were the main reasons behind upward revision to GFCF growth. Dwellings revisions were because of updated construction output data, while transport equipment, and ICT equipment and other machinery and equipment were affected by the improved product allocation and the improved SIC conversion. Business investment was revised downwards because of other buildings and structures, and IPP.

Quarter 1 2019

The downward revisions to GFCF and business investment growth, in particular ICT equipment and other machinery and equipment were because of later data from the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS), the improved product allocation and the improved SIC conversion.

Quarter 2 2019

The upward revisions to GFCF and business investment growth were because of later survey data, which impacted other buildings and structures and transfer costs, and transport equipment. These were partially offset by a negative revision to ICT equipment and other machinery and equipment, which was impacted by the improved product allocation and the improved SIC conversion.

In Quarter 2 (Apr to June) 2019, of the G7 nations, only Canada had more negative quarter-on-quarter growth in gross fixed capital formation (GFCF) than the UK, as GFCF fell by 1.7%. GFCF in Germany fell by 0.1%, the only other G7 country that saw a reduction in GFCF in Quarter 2 2019.

Figure 7 shows UK GFCF compared with a range of other G7 countries since Quarter 1 (Jan to Mar) 2016. Over that period, GFCF in the UK has increased by 2.8% compared with the G7 average of 7.6%. Only Canada has seen less GFCF growth in this period, where GFCF increased by 0.4%. Italy and France have seen the largest increases in GFCF growth in this period, with growth of 12.8% and 11.1% respectively.

UK GFCF growth since the end of 2016 has been broadly flatter than the rest of the G7 after stronger growth in Quarter 2 and Quarter 3 2016. GFCF growth in the G7 countries has slowed since the start of 2018.

Figure 7: GFCF growth in the UK has been weaker than the G7 average since Quarter 1 2016

Indexed, Quarter 1 2016 = 100, chained volume measure, seasonally adjusted, UK

Notes:

1. The data in this chart cover Quarter 1 (Jan to Mar) 2016 to Quarter 2 2019.

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.

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
Bulletin | Quarterly
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
Bulletin | Quarterly
Includes UK data on GFCF and changes in inventories.

UK Economic Accounts
Dataset | Quarterly
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
Compendium | Released 31 July 2018
Annual publication of the UK National Accounts, including data on GFCF. The 2019 edition is to be published on 31 October.

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 last 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. At the provisional estimate of business investment for Quarter 2 (Jan to Mar) 2019, the bias adjustment was positive £933 million. This has been removed in this revised release.

Survey response rates

Table 2 presents the provisional, revised and final response rates for the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) for the latest quarters. Estimates in this release are based on the Quarter 1 (Jan to Mar) 2019 revised survey results.