Business investment in the UK: January to March 2017 revised results

• Gross fixed capital formation (GFCF), in volume terms, was estimated to have increased by 1.0% to £78.9 billion in Quarter 1 (Jan to Mar) 2017 from £78.1 billion in Quarter 4 (Oct to Dec) 2016, revised down from the 1.2% increase published in the provisional estimate.

• Business investment was estimated to have increased by 0.6%, to £43.7 billion between Quarter 4 2016 and Quarter 1 2017, unchanged from the provisional estimate.

• Between Quarter 1 2016 and Quarter 1 2017, GFCF was estimated to have increased by 2.0%, from £77.3 billion and business investment was estimated to have increased by 0.7% from £43.4 billion.

• The sectors contributing most to GFCF growth between Quarter 4 2016 and Quarter 1 2017 were private sector dwellings and business investment; other buildings and structures, and dwellings were the assets which contributed most to the increase in GFCF for the same period.

• The 0.6% increase in business investment in Quarter 1 2017 was due to increases in other machinery and equipment, and intellectual property products (IPP), particularly software data.

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 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), 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.

Between Quarter 4 (Oct to Dec) 2016 and Quarter 1 (Jan to Mar) 2017, gross fixed capital formation (GFCF) increased by 1.0%. On a sector basis, private sector dwellings contributed 0.6 percentage points to overall GFCF growth, and business investment contributed 0.3 percentage points (Figure 1).

Between Quarter 1 2016 and Quarter 1 2017, GFCF increased by 2.0%. The general government sector was the biggest factor in this increase, having contributed 1.0 percentage points to growth. Private sector dwellings also increased, contributing 0.8 percentage points to growth. The largest fall quarter on same quarter a year ago was in private sector transfer costs, which contributed negative 0.2 percentage points to growth over the same time period. Quarter 1 2016 represented the highest level of private sector transfer costs since Quarter 2 2008. The Bank of England’s Summary of Business Conditions from May 2016 suggested that this was due to an increase in Stamp Duty from April 2016. Private sector transfer costs was the only sector to have decreased when compared with the same quarter a year earlier.

On an asset basis, other buildings and structures and transfer costs, and dwellings contributed 0.6 and 0.5 percentage points respectively to the 1.0% increase in GFCF (Figure 2). A smaller contribution of 0.2 percentage points came from transport equipment. Information and communication technology (ICT) equipment and other machinery and equipment contributed negative 0.4 percentage points in the same period. Quarter on same quarter a year ago growth for Quarter 1 2017 saw positive contributions from dwellings, other buildings and structures and transfer costs, and intellectual property products.

Gross fixed capital formation (GFCF) is now 3.1% above the pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008 and 31.8% above the level seen at the trough of the financial crisis in Quarter 2 (Apr to June) 2009.

Growth of 1.0% represents the strongest quarter-on-quarter growth for GFCF since Quarter 2 2015 when GFCF increased by 1.2%. Quarterly growth in GFCF was subdued over the course of 2016; values of 0.0% and 0.2% were seen in Quarter 1 2016 and Quarter 2 2016 respectively, whilst growth of 0.6% in Quarter 3 (July to Sept) 2016 was followed by growth of 0.1% in Quarter 4 (Oct to Dec) 2016 (Figure 3).

For the calendar year of 2016, GFCF increased by 0.5%, the weakest growth for a calendar year since 2009. Total GFCF growth has been consistently slowing since 2014. Quarter on same quarter a year ago growth averaged 6.8% in 2014, fell to 3.5% in 2015 then fell further to 0.5% for 2016.

Developments in the housing market can be an important indicator of investment and wider activity in the economy. Construction grew by 1.1% in Quarter 1 (Jan to Mar) 2017 (Construction output in Great Britain: Apr 2017 and new orders Jan to Mar 2017). This is driven mainly by an increase in new housing work, which is reflected in the 2.2% increase in dwellings in Quarter 1 2017 when compared with Quarter 4 (Oct to Dec) 2016.

Business investment in 2016 saw 2 consecutive quarters of positive growth in Quarter 2 (Apr to June) 2016 (0.8%) and Quarter 3 (July to Sept) 2016 (0.4%) and 2 quarters of negative growth in Quarter 1 (Jan to Mar) 2016 (1.1%) and Quarter 4 (Oct to Dec) 2016 (0.9%). The level of business investment has remained broadly unchanged since Quarter 1 2015 (Figure 4).

The 0.7% increase in business investment quarter on same quarter a year ago follows 4 consecutive periods of negative growth in business investment. Annually, business investment contracted by 1.5% in 2016 when compared with 2015. Business investment is now 6.9% above the pre-economic downturn peak of Quarter 1 2008 and 31.7% above the financial crisis trough of Quarter 2 2009.

The assets contributing most to business investment growth between Quarter 4 (Oct to Dec) 2016 and Quarter 1 (Jan to Mar) 2017 were other machinery and equipment, and intellectual property products (IPP), particularly software data. A smaller increase was seen in transport equipment. The largest fall in business investment came from other buildings and structures.

The largest contributors to quarter on same quarter a year ago growth in business investment were broadly similar to quarter-on-quarter growth. The 0.7% increase was due to other machinery and equipment, and IPP. The IPP increase was due mainly to growth in research and development. This overall increase was partially offset by a fall in other buildings and structures.

Quarter 1 (Jan to Mar) 2017 marks 3 full quarters since the UK voted to leave the EU. The Bank of England recently stated that investment intentions have increased in its most recent Agents’ summary of business conditions. This is, in part, due to stronger demand from consumers after the EU referendum. In its most recent inflation report, the Bank of England also states that the near-term outlook for business investment is “judged to be somewhat stronger than projected in February”.

Another important factor to consider when looking at business investment is the availability or supply of credit. In the most recent Bank of England Credit Conditions Review, the supply of lending to firms was found to have remained broadly unchanged. However, survey data suggested that corporate demand for credit continued to soften for medium-sized firms, mirroring a trend seen in Quarter 4 (Oct to Dec) 2016. Demand from small firms and large firms was found to have remained largely the same.

Data in this release have been revised from the provisional release in line with the National Accounts Revisions Policy. Only Quarter 1 (Jan to Mar) 2017 is currently open for revision.

The main causes of revisions in the data are:

• later responses to the Quarterly Acquisitions and Disposals of Capital Assets Survey
• later data from non-survey sources mainly affecting data for general government
• replacing forecasted data used at the time of the provisional release

Figure 5 shows the provisional (month 2) value of gross fixed capital formation (GFCF) compared with the revised (month 3) value between Quarter 1 2016 and Quarter 1 2017. The downwards revision has been seen mainly as a result of a revised dwellings estimate, which has decreased from 3.6% to 2.2%. The growth rate of business investment was unchanged from the provisional release for Quarter 1 2017 (Figure 6). For a detailed breakdown of past revisions to business investment, please see the business investment revisions triangle.

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%.

Further to this, we will also introduce a number of other methodology changes to the estimates of GFCF and business investment. This will include the final integration of the new GFCF estimation system, which was first used for the Quarter 4 (Oct to Dec) 2016 provisional publication. Detailed explanations of these changes can be found in the Annual improvements to gross fixed capital formation source data for Blue Book 2017 article published on 16 February 2017.

As part of an ongoing review of the Business investment statistical bulletin, we will be adding further content over the coming months to widen the information available on business investment and GFCF.

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

• the strengths and limitations of the data
• the quality of the output, including the accuracy of the data and how it compares with related data
• uses and users
• how the output was created

The changes signposted in this bulletin have not yet been reflected in either the Quality Survey of Capital Expenditure QMI or the Business Investment QMI, but changes will be incorporated into revised QMIs in the future.

In February 2017, we introduced an improved GFCF estimation system, which incorporated methodological changes including improved deflation and seasonal adjustment. A data impact assessment of the new GFCF system for the periods Quarter 1 (Jan to Mar) 2016 to Quarter 3 (July to Sept) 2016 can be found in an accompanying article: Gross fixed capital formation (GFCF) new system deployment and data impact assessment. Further information on the methods changes introduced in the new GFCF estimation system can be found in the article Changes to the Gross Fixed Capital Formation methodology and processing.

Adjustments

A bias adjustment of £0.6 billion was included in the provisional (month 2) release for Quarter 1 (Jan to Mar) 2017, which has now been removed in its entirety. The bias adjustment is used to reflect the fact that businesses tend to report large capital expenditure later in the reporting cycle, in time for the revised business investment release.

To improve the quality of the response from our data suppliers, 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 as other capital equipment (OCE). From Quarter 1 2015, respondents to the survey are now reporting more in new construction work at the expense of 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 to Quarter 1 2017. These adjustments are shown in Table 2. As part of the planned changes announced to coincide with Blue Book 2017, improvements to the source data for GFCF will result in the removal of these adjustments. For more information, please see Annual improvements to gross fixed capital formation source data for Blue Book 2017.

Survey response rates

Table 3 presents the provisional (month 2) and revised (month 3) response rates for the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS). The estimates in this release are based on the Quarter 1 2017 revised survey results.

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).

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

• Retail sales - monthly estimate of UK retail sales

• UK manufacturers' sales by product (PRODCOM) - annual output by manufacturers

• Labour market statistics - monthly data on employment, unemployment, economic inactivity, claimant count, average earnings, labour productivity, vacancies and labour disputes

• Business demography – annual statistics on UK business births, deaths and survival