Business investment in the UK: January to March 2019 revised results

• Business investment, in volume terms, was estimated to have increased by 0.4% to £46.9 billion between Quarter 4 (Oct to Dec) 2018 and Quarter 1 (Jan to Mar) 2019; this follows four consecutive quarter-on-quarter falls in business investment.

• Gross fixed capital formation (GFCF), in volume terms, was estimated to have increased by 1.2% to £86.8 billion between Quarter 4 2018 and Quarter 1 2019.

• Between Quarter 1 2018 and Quarter 1 2019, business investment was estimated to have fallen by 1.5% from £47.7 billion; GFCF was estimated to have increased by 0.9% in the same period from £86.0 billion.

• The asset that contributed most to the increase in business investment between Quarter 4 2018 and Quarter 1 2019 was other buildings and structures; intellectual property products also contributed positively while transport equipment provided the only negative contribution.

• The largest positive contribution to the 1.2% GFCF increase between Quarter 4 2018 and Quarter 1 2019, on a sector basis, came from general government, with public corporations’ dwellings and business investment also contributing positively; on an asset basis, other buildings and structures and transfer costs contributed most to the GFCF increase, with all other assets, with the exception of transport equipment, also contributing positively.

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 (QMI) was updated in January 2018 and includes updated 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 around 290 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 2019. As a result, we have made an adjustment of approximately £240 million 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 this revised dataset was ICT equipment and other machinery and equipment.

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

We will also continue to monitor the impact of IFRS 16’s introduction in Quarter 2 (Apr to June) 2019 as some companies we contacted told us they would introduce IFRS 16 at the start of the new financial year ending 2020.

Blue Book 2019

Each year we produce an annual update to the UK National Accounts in the Blue Book and Pink Book and the associated releases. As already announced, the Blue Book and Pink Book 2019 consistent datasets will be published on 30 September 2019. Details have already been provided on the scope in the article Latest developments and changes to be implemented in Blue Book and Pink Book 2019 and indicative impacts on headline gross domestic product components for the years 1997 to 2016 were published on 27 June 2019 in the article National Accounts articles: Blue Book 2019 indicative impacts on GDP current price and chained volume measure estimates: 1997 to 2016.

This year, due to the very demanding set of changes being put through in the annual update, we are not going to fully reconcile 2017 annual GDP data, instead producing an indicative balance to allow further time for final quality assurance of the data. As a consequence, the reference year and last base year for all chained volume measure series will remain as 2016. Further articles are planned ahead of the 30 September 2019 releases as detailed in Table 1.

Between Quarter 4 (Oct to Dec) 2018 and Quarter 1 (Jan to Mar) 2019, gross fixed capital formation (GFCF) increased by 1.2%, the highest rate of growth since Quarter 2 (Apr to June) 2017, when GFCF increased by 1.9% compared with Quarter 1 2017.

On a sector basis, the largest positive contribution came from general government, which contributed 0.9 percentage points. The general government increase in the latest quarter was due to increased investment across a number of central government departments. Public sector dwellings and business investment made positive contributions of 0.3 and 0.2 percentage points respectively. Private sector dwellings provided the only negative contribution at negative 0.1 percentage points (Figure 1). Note that contributions may not sum to the total growth due to rounding.

Between Quarter 1 2018 and Quarter 1 2019, GFCF increased by 0.9%. As with the quarter-on-quarter GFCF increase, general government again contributed the majority of the increase, contributing 1.8 percentage points. Business investment made the largest negative contribution to GFCF growth between Quarter 1 2018 and Quarter 1 2019, contributing negative 0.9 percentage points and had also contracted quarter on same quarter a year ago in the two previous quarters.

Other buildings and structures and transfer costs together with intellectual property products assets contributed positive 0.9 and 0.4 percentage points respectively to the 1.2% increase in gross fixed capital formation (GFCF) between Quarter 4 (Oct to Dec) 2018 and Quarter 1 (Jan to Mar) 2019. Transport contributed negative 0.5 percentage points to GFCF and, with the exception of Quarter 1 2018, has fallen each quarter since Quarter 3 (July to Sept) 2017 (Figure 2).

Between Quarter 1 2018 and Quarter 1 2019, the largest contributions to the 0.9% GFCF increase came from other buildings and structures and transfer costs, which contributed 2.2 percentage points. Intellectual property products contributed 0.4 percentage points. Transport provided the larger negative contribution of 1.6 percentage points, partially offsetting the overall GFCF increase.

Developments in the housing market can be an important indicator of investment and wider activity in the economy. The estimates in this publication incorporate data consistent with Construction output in Great Britain: April 2019 and new orders January to March 2019, published on 10 June 2019. The Construction output in Great Britain bulletin shows construction work increased by 1.0% in the three months to March 2019, due mostly to the all repair and maintenance series.

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

Business investment grew by 0.4% between Quarter 4 (Oct to Dec) 2018 and Quarter 1 (Jan to Mar) 2019, following falls of in each of the four quarters of 2018. This marked the first positive growth since Quarter 4 2017.

Figure 3 shows that other buildings and structures contributed most to the increase between Quarter 4 2018 and Quarter 1 2019 at 1.2 percentage points. Intellectual property products (IPP) contributed 0.1 percentage points. These increases were partially offset by transport’s negative contribution of 0.9 percentage points. ICT equipment and other machinery and equipment made no contribution to business investment growth.

Compared with Quarter 1 2018, business investment fell by 1.5%. This follows a fall of 2.5% in Quarter 4 2018 compared with Quarter 4 2017.

Transport made the biggest contribution to the 1.5% fall in business investment between Quarter 1 2018 and Quarter 1 2019, contributing negative 3.0 percentage points. This marked nine consecutive quarters of negative contribution to quarter on same quarter a year ago growth.

ICT equipment and other machinery and equipment and IPP also made negative contributions of negative 1.3 and negative 0.1 percentage points respectively. Other buildings and structures made the only positive contribution at 2.8 percentage points, having contributed positively for the last nine successive quarters.

Figure 4 shows contributions to quarter-on-quarter business investment growth since Quarter 1 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 negative contributions to business investment growth in three of the four quarters of 2018.

Transport equipment is the other main contributor to the overall slowdown, with recent falls in this asset due largely to decreased aircraft investment. The recent weakness in transport investment has continued into Quarter 1 2019 as transport was the only asset that decreased in that quarter. Further analysis can be found in the article Business investment in the UK: analysis by asset, published on 29 March 2019.

Data on business investment by industry and asset show that within the manufacturing industries, private sector manufacturing contributed most to the 0.4% quarter-on-quarter business investment increase, while within the non-manufacturing industries, other production contributed most.

Within private sector manufacturing, the food, drink and tobacco, and engineering and vehicles industries contributed most, while within other production, the electricity, gas and water industries were the strongest contributors to its overall increase.

Some caution needs to be used when interpreting data at this detailed industry level, as lower-level data can be more volatile quarter-on-quarter; using data over a longer time period can give a more stable picture.

The falls in business investment for Quarter 1 (Jan to Mar) 2018 through to Quarter 4 (Oct to Dec) 2018 followed three consecutive quarter-on-quarter increases in 2017. Figure 5 shows that following the fall in business investment during the economic downturn of Quarter 1 2008 to Quarter 2 (Apr to June) 2009, there was a period of strong, albeit volatile growth before 2015. Growth in business investment was more moderate from 2015, before falling in each quarter of 2018.

Business investment is now 1.5% above the level seen in Quarter 1 2016, the quarter prior to the EU referendum and has fallen 0.8% since Quarter 3 (July to Sept) 2016, the quarter following the EU referendum.

The Bank of England, in its most recent Agents’ summary of business conditions, stated that contacts mostly cited “Brexit uncertainty as the main reason for holding back investment, with some choosing instead to build cash reserves or inventories… However, companies continued to invest in replacing essential kit, or in projects with a short pay-back period”.

The Bank of England also noted in its May 2019 Inflation Report that while “Many of the determinants of business investment have remained supportive… The weakness of business investment despite these supportive factors suggests that Brexit-related uncertainties have had an impact”.

In Quarter 1 (Jan to Mar) 2019, the UK had the strongest quarter-on-quarter growth in gross fixed capital formation (GFCF) of any G7 nation at 1.2%, followed by Germany at 1.1%. None of the G7 nations experienced negative growth in GFCF in Quarter 1 2019 (Figure 6).

The US had the strongest quarter on same quarter a year ago growth of the G7 nations at 3.2%, followed by France and Germany, which each grew at 3.0% and then Italy at 2.6%. Canada was the only G7 nation where GFCF fell quarter on same quarter a year ago, falling by 3.2%.

For more comprehensive comparisons of GFCF, please refer to An international comparison of gross fixed capital formation, published in November 2017 and An analysis of investment expenditure in the UK and other Organisation for Economic Co-operation and Development nations, published in 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.

Revisions have been made to gross fixed capital formation (GFCF) and business investment for Quarter 1 (Jan to Mar) 2019, in line with the National Accounts Revisions Policy. These are due mainly to taking on later source data in addition to revisions due to seasonal adjustment.

The 0.9 percentage points downward revision to GFCF growth in Quarter 1 2019 was due mainly to the incorporation of later and revised data from general government, which was revised down by 2.9 percentage points as initial budget estimates were replaced by provisional financial year data. This contributed to the 5.2 percentage points downward revision for ICT equipment and other machinery and equipment asset.

Business investment was revised down by 0.1 percentage points in Quarter 1 2019 from the provisional 0.5% rise. Revisions to business investment growth were due mainly to revised and later data from the Quarterly Acquisitions and Disposals of Capital Assets Survey (QCAS), as well as seasonal adjustment.

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 – 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

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 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 1 (Jan to Mar) 2019, the bias adjustment was positive £663 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.