Business investment in the UK: April to June 2016 provisional results

Gross fixed capital formation (GFCF), in volume terms, was estimated to have increased by 1.4% to £78.2 billion between Quarter 1 (Jan to Mar) 2016 and Quarter 2 (Apr to June) 2016. This is the highest level of GFCF since Quarter 4 (Oct to Dec) 2007, when GFCF was £80.4 billion.

Between Quarter 1 2016 and Quarter 2 2016, business investment, in volume terms, was estimated to have increased by 0.5%, from £43.7 billion to £43.9 billion.

Between Quarter 2 2015 and Quarter 2 2016, GFCF was estimated to have increased by 0.9%, from £77.4 billion to £78.2 billion.

Business investment was estimated to have decreased by 0.8% between Quarter 2 2015 and Quarter 2 2016, from £44.2 billion to £43.9 billion.

In line with the National Accounts Revisions Policy, there are no revisions to estimates for previous quarters in 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 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.

Figures 1 and 2 show that in the second quarter (Apr to June) of 2016, gross fixed capital formation (GFCF) increased by £1.1 billion (1.4%) compared with Quarter 1 (Jan to Mar) 2016. This increase follows consecutive decreases for GFCF of 1.0% in Quarter 4 (Oct to Dec) 2015 and 0.1% in Quarter 1 2016. GFCF in Quarter 2 2016 was £78.2 billion, 0.9% higher than Quarter 2 2015 (Figure 1).

The GFCF increase came from the general government sector, which increased by £1.2 billion in Quarter 2 2016 on the previous quarter. Most of this growth has come from investment in other buildings and structures. This is reflected in the growth of other buildings and structures and transfer costs for the whole economy, which has grown by 4.5% on the quarter and by 1.8% compared with Quarter 2 2015.

The general government increase has been partially offset by falls in private sector cost of ownership transfer on non-produced assets (£0.3 billion) and private sector dwellings (£0.2 billion).

Business investment in Quarter 2 2016 was £43.9 billion (Figure 3), an increase of 0.5% (Figure 4) when compared with the previous quarter. This was mainly due to an increase in investment in transport equipment. Business investment is now 7.3% above the pre-economic downturn peak of Quarter 1 2008 (£40.9 billion).

Business investment fell by 0.8% when compared with the same quarter a year ago. The main contributors to this fall are other buildings and structures and information and communication technology (ICT) equipment. These falls are partially offset by increases in transport equipment and other machinery and equipment.

Table 1 shows that in Quarter 2 (Apr to June) 2016, gross fixed capital formation (GFCF) increased by an estimated 1.4% to £78.2 billion when compared with Quarter 1 (Jan to Mar) 2016. Increases were seen in general government (10.4%), public corporation dwellings (23.6%) and business investment (0.5%). These were offset by decreases in private sector cost of ownership transfer on non-produced assets (5.0%) and private sector dwellings (1.5%).

Between Quarter 2 2015 and Quarter 2 2016, general government, and private sector cost of ownership transfer on non-produced assets were the sectors showing the largest level increases, both increasing by £0.6 billion.

The decrease in business investment of 0.8% was the second consecutive quarter on same quarter a year ago fall.

Table 2 shows that in asset terms, the largest level increase, quarter on quarter, in Quarter 2 2016 was in other buildings and structures and transfer costs, which grew by £1.1 billion (4.5%) to £25.0 billion. Intellectual property products saw the largest decrease in level terms, falling £0.4 billion (2.1%) to £16.4 billion in Quarter 2 2016.

Between Quarter 2 2015 and Quarter 2 2016, other buildings and structures and transfer costs showed the largest level increase, growing by £0.4 billion (1.8%) to £25.0 billion. Transport equipment saw the second largest level increase, having grown by £0.4 billion (8.1%) to £5.1 billion. Information and communication technology (ICT) equipment also increased by £0.4 billion on the quarter.

Gross fixed capital formation (GFCF) grew by 0.9% in the year to Quarter 2 (Apr to June) 2016 following a 0.7% increase in Quarter 1 (Jan to Mar) 2016, marking 13 consecutive periods of quarter on same quarter a year ago growth. The rate of growth in GFCF has slowed since 2014, with quarter on same quarter a year ago growth averaging 6.8% in 2014, falling to 3.4% in 2015 and 0.8% in 2016. However, on a quarter on previous quarter basis, GFCF grew by 1.4% in Quarter 2 2016, its largest increase since Quarter 1 2015, following a 0.1% contraction in the previous quarter.

The increase in GFCF quarter on same quarter a year ago was mainly driven by general government investment, and private sector costs of ownership transfer on non-produced assets, which both contributed 0.8 percentage points to overall GFCF. Business investment and private sector dwellings contributed negatively to GFCF over the same period, by -0.4 and -0.2 percentage points respectively. An important determinant of business investment is the availability or supply of lending: both fell sharply during the 2008 to 2009 economic downturn. In the most recent Bank of England Credit Conditions Review, the supply of lending of corporations was reported to be unchanged for the ninth consecutive quarter in Quarter 2 2016. On the demand side, credit demand fell for large firms but increased for small and medium sized enterprises.

Developments in the housing market can also be important for investment and wider activity. Investment in residential dwellings (the new construction and repair of homes) contracted by 0.2% on the quarter and by 0.6% on the same quarter a year ago. The contraction in dwellings investment is consistent with the Construction output in Great Britain June 2016 and Apr to June 2016, which fell by 0.7% compared with Quarter 1 2016 and 1.4% when compared with Quarter 2 2015.

On an asset basis, the quarter on same quarter a year ago increase in GFCF was driven by other buildings and structures and transfer costs (the fees paid to lawyers and surveyors among other professions for acquiring non-produced assets), which contributed 0.6 percentage points. Transport equipment, and information and communication technology (ICT) equipment and other machinery and equipment also grew, contributing 0.5 percentage points each respectively. In contrast, intellectual property products contributed -0.5 percentage points.

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 your requests. These are available to download free from our website. Enquiries about user-requested data may be made to gcf@ons.gov.uk.

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 2 (Apr to June) 2016 month 2 (provisional) survey results.

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 provisional estimate. A bias adjustment of £1.0 billion has been included in the provisional (month 2) release for Quarter 2 (Apr to June) 2016. This adjustment will be reassessed in line with previous revisions and will be updated for the Quarter 2 2016 revised estimate release.

In order to try and improve the quality of the response from our customers, clearer instructions were added to the Quarterly Survey of Capital Expenditure. These updates are outlined 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 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 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 2015, Quarter 2 2015, Quarter 3 2015, Quarter 4 (Oct to Dec) 2015, Quarter 1 2016 and Quarter 2 2016. These adjustments are shown in Table 4.

Revisions

There are no revisions in this publication, in line with the National Accounts Revisions Policy.

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

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

• users and uses of the data

• how the output was created

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

Methods

Estimates in this release have been compiled under European System of Accounts (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.

Further information on methodology

Further information about the UK National Accounts and the programme of continuous improvement can be found at:

• National Accounts methodology and articles

• Continuous Improvement of Gross Domestic Product: Sources, Methods and Communication

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.