Business investment in the UK: July to September 2016 provisional results

Gross fixed capital formation (GFCF), in volume terms, was estimated to have increased by 1.1% to £79.0 billion between Quarter 2 (Apr to June) 2016 and Quarter 3 (July to Sept) 2016.

Between Quarter 2 2016 and Quarter 3 2016, business investment, in volume terms, was estimated to have increased by 0.9%, from £43.8 billion to £44.2 billion.

Between Quarter 3 2015 and Quarter 3 2016, GFCF was estimated to have increased by 1.2%, from £78.0 billion to £79.0 billion.

Business investment was estimated to have decreased by 1.6% between Quarter 3 2015 and Quarter 3 2016, from £44.9 billion to £44.2 billion.

This Business Investment release covers Quarter 3 (July to Sept) 2016, the first full quarter since the EU referendum. Since the result, business investment has grown broadly in line with the previous quarter. This suggests limited impact so far from the referendum.

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

Introduction of theme days

From January 2017 we are improving the way we publish economic statistics, with related data grouped together under new "theme" days. This will increase the coherence of our data releases and involve minor changes to the timing of certain publications. For more information see Changes to publication schedule for economic statistics.

Changes to gross fixed capital formation (GFCF) estimation system

We are currently redeveloping the GFCF estimation system in line with the 5-year strategy for the UK National Accounts, 2015 to 2020 published in July 2015 and recommendations from the Bean Review. As a result we will be introducing some methodological changes to the new GFCF system, including improved deflation and seasonal adjustment methodology. We will be publishing more information on the impact of these changes on the GFCF dataset prior to its introduction ahead of Blue Book 2017.

Purchased software

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%.

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 Quarter 3 (July to Sept) 2016, gross fixed capital formation (GFCF) increased by £0.9 billion (1.1%) compared with Quarter 2 (Apr to June) 2016. This means GFCF has increased for 2 two consecutive quarters, having previously increased by 1.6% in Quarter 2 2016. Compared with the same quarter a year ago, GFCF in Quarter 3 2016 was £79.0 billion, 1.2% higher than Quarter 3 2015 (Figure 1).

GFCF is now 3.2% above the pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008 (£76.5 billion).

Business investment in Quarter 3 2016 was £44.2 billion (Figure 3), an increase of 0.9% (Figure 4) when compared with the previous quarter. This was mainly due to an increase in investment in other building and structures. As illustrated in Figures 3 and 4, business investment has seen 2 consecutive periods of positive quarter- on- quarter growth. Business investment is now 8.0% above the pre-economic downturn peak of Quarter 1 2008 (£40.9 billion).

Business investment in Quarter 3 2016 fell by 1.6% when compared with the same quarter a year ago. This decrease in business investment marks 3 consecutive periods of negative growth when compared with the same quarter a year earlier. The main contributors to the decrease are other machinery and equipment, and other buildings and structures. These falls are partially offset by increases in transport equipment.

Table 1 shows that in Quarter 3 (July to Sept) 2016, gross fixed capital formation (GFCF) increased by 1.1% to £79.0 billion when compared with Quarter 2 (Apr to June) 2016. The largest level increase was seen in the general government sector, which rose by £0.5 billion (4.0%) to £12.8 billion; its highest level since Quarter 1 (Jan to Mar) 2014. The second largest level increase was in business investment, which rose by £0.4 billion (0.9%). These were partially offset by a decrease of 3.1% (£0.2 billion) in private sector cost of ownership transfer on non-produced assets.

Between Quarter 3 2015 and Quarter 3 2016, the largest level increases were seen in general government (£0.8 billion) and private sector dwellings (£0.7 billion). These were partially offset by a decrease of £0.7 billion in business investment.

Table 2 shows that in asset terms, the increase in GFCF in Quarter 3 2016 was primarily due to an increase in other buildings and structures and transfer costs, which grew by £0.8 billion (3.2%) quarter- on- quarter to £25.2 billion. Transport equipment saw the largest decrease in level terms, falling £0.1 billion (2.3%) to £5.2 billion in Quarter 3 2016.

Between Quarter 3 2015 and Quarter 3 2016, transport equipment saw the largest level increase of £1.1 billion (25.1%) to £5.2 billion. Dwellings also increased quarter on the same quarter a year ago, having grown by £0.8 billion (4.8%) to £17.0 billion in Quarter 3 2016.

These increases were partially offset by a decrease in information and communication technology (ICT) equipment and other machinery and equipment, which decreased by 3.6% (£0.5 billion). Other buildings and structures and transfer costs also decreased by 1.5 % (£0.4 billion).

Gross fixed capital formation (GFCF) grew by 1.2% between Quarter 3 (July to Sept) 2015 and Quarter 3 2016 following a 1.0% increase in Quarter 2 (Apr to June) 2016, marking 14 consecutive periods of quarter on same quarter a year ago growth. However, the rate of growth in GFCF has slowed consistently since 2014. Quarter on same quarter a year ago growth averaged 6.8% in 2014; fell to 3.4% in 2015 then fell further to 0.8% across the first 3 quarters of 2016.

On a sector basis, the increase in GFCF, quarter on same quarter a year ago, was mainly driven by investment by general government, which contributed 1.1 percentage points to overall GFCF growth. In contrast, business investment made an offsetting negative contribution to GFCF growth over the same period (negative 0.9 percentage points). An important factor to consider when looking at business investment is the availability or supply of lending. In the most recent Bank of England’s Credit Conditions Review the supply of lending to companies was reported to be broadly unchanged in Quarter 3 2016. Over the same period, credit demand fell for firms of all business sizes.

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) grew by 0.8% in Quarter 3 2016 on a quarter-on-quarter basis and by 4.8% on the same quarter a year ago basis. This reflects a mixed picture in the construction industry; the construction of new build housing increased by 8.7% on a same quarter a year ago basis, however, the repair and maintenance of housing fell to 4.8% (Construction output in Great Britain: Sept 2016 and July to Sept 2016). Over the year to September 2016, house prices as measured by the Office for National Statistics rose by 7.7%. Furthermore, new housing orders increased by 22% in Quarter 2 2016 when compared with Quarter 1 2016, which will affect investment for later periods (New orders in the construction industry).

On an asset basis, the quarter on same quarter a year ago increase in GFCF was mainly driven by transport equipment, which contributed 1.3 percentage points to growth, while ICT equipment and other machinery and equipment made the largest negative contribution to GFCF (negative 0.7 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 3 (July to Sept) 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 £0.8 billion has been included in the provisional (month 2) release for Quarter 3 (July to Sept) 2016. This adjustment will be reassessed in line with previous revisions and will be updated for the Quarter 3 2016 revised estimate.

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 to Quarter 3 2016. These adjustments are shown in Table 4.

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.