Business investment in the UK: April to June 2015 revised results

• These estimates are short-term indicators of investment in assets, such as dwellings, transport equipment, machinery, buildings and intangible assets. This release covers asset breakdowns of total gross fixed capital formation (GFCF), of which business investment is one component

• This release includes improvements to methods and data emanating from the changes to Gross National Income (GNI) on the European System of Accounts 1995 (ESA 1995) basis. These estimates are consistent with the UK Annual National Accounts (Blue Book) 2015 and have been revised from Quarter 1 (Jan to Mar) 1997 to the latest period

• All investment data referred to are estimates of seasonally adjusted chained volume measures

• In Quarter 2 (Apr to June) 2015, GFCF was estimated to have increased by £0.8 billion (1.0%), compared with the previous quarter, to £76.3 billion. This is the highest level since Quarter 4 (Oct to Dec) 2007

• In Quarter 2 (Apr to June) 2015, business investment was estimated to have increased by £0.7 billion (1.6%), compared with the previous quarter, to £43.5 billion

• In Quarter 2 (Apr to June) 2015, GFCF was estimated to have increased by 3.4% compared with Quarter 2 (Apr to June) 2014

• In Quarter 2 (Apr to June) 2015, business investment increased by 3.1% compared with Quarter 2 (Apr to June) 2014

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, technology and communications (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. Note that 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.

Estimates in this release have been compiled in accordance with the regulations for Gross National Income (GNI) on the European System of Accounts 1995 (ESA 1995) basis. As a result of the improvements to methods and data emanating from this, a number of changes have been implemented in this release, which is consistent with the UK Annual National Accounts (Blue Book) 2015. Further details about these changes can be found in Changes to National Accounts GFCF and Business Investment – impact of incorporating Blue Book 2015 changes. The estimates in this release have been revised from Quarter 1 (Jan to Mar) 1997 to the latest period.

Main changes

The main changes to the compilation of GFCF estimates are:

• new data for do-it-yourself capital expenditure

• improved estimates of Stamp Duty

• improved estimates of research and development tax credits

• improved estimates of small businesses

• improved software deflator

• annual updates to source data

Business Investment has been affected by 4 of the above changes:

• improved estimates of research and development tax credits

• improved estimates of small businesses

• improved software deflator

• annual updates to source data

Changes to the Quarterly Survey of Capital Expenditure in Quarter 1 (Jan to Mar) 2015

As described in the Business Investment, Quarter 4 (Oct to Dec) 2014 Revised Results bulletin and in Changes to the Annual Business Survey, the Quarterly Survey of Capital Expenditure and the Survey into Business Spending on Capital Items, in 2015 (114.3 Kb Pdf), we moved to the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS) from the Quarterly Survey of Capital Expenditure (CAPEX). The main reason is to move to the updated European System of Accounts (ESA) 2010 manual, the international guidance for national accounts.

The main changes to the survey are:

• adding new questions to improve the quality of our estimates and to meet the latest European legislation requirements (ESA 2010)

• removing the lower limit of £500 for the value of reported assets, so all relevant assets (even those below businesses’ Asset Register threshold) can be reported

• including small tools used in production in the definition of GFCF

• improving the questionnaire’s layout, including new sections and headings, to make completing the questionnaire easier

The data from the new questions will not be included in estimates of GFCF and its components until 2017, when there will be 2 years of data available for quality assurance.

Further methodological information including changes to the UK National Accounts

Estimates in this release have been compiled under 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.

On 19 May 2015 we published several articles explaining the changes that will be implemented in the UK National Accounts (Blue Book) 2015, to be published in October 2015. These articles describe changes related to ongoing work to meet ESA 1995 requirements. These include changes that impact GFCF and its components, specifically spending on repairs and maintenance of dwellings and exhaustiveness. There is a comprehensive list of all published articles relating to changes to the UK National Accounts (Blue Book). This list will be updated when new articles are published.

Figure 4 shows a large spike in business investment in Quarter 2 (Apr to June) 2005. This is due to the transfer of British Nuclear Fuels Ltd (BNFL). In April 2005, nuclear reactors were transferred from BNFL to the Nuclear Decommissioning Authority (NDA). BNFL is classified as a public corporation in National Accounts, while the NDA is a central government body. The business investment series includes investment by public corporations, but not government spending, the positive spike reflects the £15.6 billion transfer. More information on the transfer of BNFL can be found in section 3 of the background notes.

Summary tables

In Quarter 2 (Apr to June) 2015 total gross fixed capital formation increased by an estimated £0.8 billion (1.0%) compared with the previous quarter. Business investment also saw an increase of 1.6%, rising by an estimated £0.7 billion. Additionally, general government saw an increase of 2.7%, rising by an estimated £0.3 billion.

In Quarter 2 (Apr to Jun) 2015, intellectual property products saw the largest level increase rising by an estimated £0.6 billion (3.6%). ICT equipment and other machinery and equipment saw the second highest level increase of an estimated £0.5 billion (3.0%). These increases were partially offset by a decrease in dwellings of an estimated £0.6 billion (3.5%).

In Quarter 2 (Apr to June) 2015 business investment grew by 1.6%, the third successive quarter of growth. Business investment growth quarter on same quarter a year ago has been positive since Quarter 2 (Apr to June) 2013 but slowed to 3.1% in Quarter 2 (Apr to June) 2015 from a rate of 7.0% in the previous quarter. Gross fixed capital formation (GFCF) also grew robustly, by 3.4%. This increase is consistent with GDP which grew by 2.4% in Quarter 2 (Apr to June) 2015 on the same quarter a year ago.

By sector class, the increase in GFCF was driven by general government which was 11.0% higher than the same quarter a year earlier, and by business investment. In contrast, investment in dwellings by the private sector put downward pressure on overall GFCF. The weakening in private sector dwellings investment may be due to a slowdown in house price growth. The House Price Index (HPI) showed that UK house price growth was 5.2% in July 2015, compared with 5.7% in June 2015. On a quarterly basis, GFCF grew by 1.0%; this growth was also driven by business investment and general government spending. All asset classes grew strongly with the exception of dwellings which contracted in Quarter 2 (Apr to June) 2015, compared with the same period a year earlier. The easing of investment in dwellings is consistent with the softening in construction output growth in 2015. On a quarterly basis, the increase in GFCF was driven by investment in intellectual property which grew by 3.6%, and ICT and other machinery and equipment, which increased by 3.0% in Quarter 2 (Apr to June) 2015. Investment in dwellings also contracted and exerted downward pressure on GFCF.

In contrast, the Bank of England's Inflation Report for August 2015 noted that dwellings investment, which includes spending on new buildings and home improvements, has been growing strongly. This increase in investment is reflected by external indicators that show improving business confidence.

The Bank of England's Credit Conditions Survey for Q2 2015 showed a significant increase in demand for lending from small businesses in Quarter 2 (Apr to June) 2015. The demand for loans from large private non-financial corporations also increased in Quarter 2 (Apr to June) 2015. This may have encouraged businesses to invest using both internal and external sources of finance.

Furthermore, the Inflation Report showed that the increase in aggregate demand, which resulted in the desire for companies to increase capacity, is likely to have been a main driver of the strength in business investment. This is demonstrated by surveys which show that capacity utilisation is close to or a little above historical averages. For example, the CBI service sector survey has indicated that the number of firms which invest to expand capacity has risen to its pre-downturn level.

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 ad hoc user requests. These are available to download free from our website. Enquiries about ad hoc requests may be made to gcf@ons.gov.uk.

Adjustments

Large capital expenditure tends to be reported later in the data collection period than smaller 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 Sep) 2013, a bias adjustment was introduced to GFCF and its components in the provisional estimate. A bias adjustment of £1billion was included in the provisional (month 2) release for Quarter 2(Apr to June) 2015. This has been removed for the revised (month 3) release.

The Quarterly Survey of Capital Expenditure was improved by adding clearer instructions. As detailed 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 (NCW) as other capital equipment (OCE). From Quarter 1 (Jan to Mar) 2015 respondents to the survey are now reporting more in new construction work at the expense of other capital equipment. In order to remain consistent with the previous data, we have made some adjustments to the assets in the current price series in Quarter 1 (Jan to Mar) and Quarter 2 (Apr to June) 2015. Quality adjustments of -£1.5bn in Quarter 1 (Jan to Mar) and -£1.8bn in Quarter 2 (Apr to June) have been applied to asset buildings and +£1.5bn in Quarter 1 (Jan to Mar) and +£1.8bn in Quarter 2 (Apr to June) to other machinery. These adjustments will be reviewed as the survey response increases.

Forecast data

In this release, estimates of investment in research and development and artistic originals have been forecast.

Revisions

Data in this release has been revised from Quarter 1 (Jan to Mar) 1997 to Quarter 2 (Apr to Jun) 2015.

Survey response rates

Table 2 presents the 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) 2015 month 3 (revised) survey results.