Business investment in the UK: October to December 2018 revised results

• Business investment, in volume terms, was estimated to have fallen by 0.9% to £46.7 billion between Quarter 3 (July to Sept) 2018 and Quarter 4 (Oct to Dec) 2018; this is the fourth consecutive quarter-on-quarter fall in business investment and the first time this has happened since the economic downturn of 2008 to 2009.

• Gross fixed capital formation (GFCF), in volume terms, was estimated to have fallen by 0.6% to £85.7 billion between Quarter 3 and Quarter 4 2018.

• Between Quarter 4 2017 and Quarter 4 2018, business investment was estimated to have fallen by 2.5% from £48.0 billion; GFCF was estimated to have fallen by 1.1% from £86.7 billion.

• The assets that contributed to the fall in business investment between Quarter 3 2018 and Quarter 4 2018 were information and communication technology (ICT) equipment and other machinery and equipment and intellectual property products.

• The largest negative contribution to the 0.6% GFCF fall between Quarter 3 2018 and Quarter 4 2018 came from business investment; the assets that contributed to the fall were ICT equipment and other machinery and equipment and dwellings.

• Between 2017 and 2018, business investment fell by 0.4%, while GFCF grew by 0.2%.

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), 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.

The Business investment Quality and Methodology Information report was updated in January 2018 and includes updated information on the quality and methodology used in the production of business investment statistics.

As of January 1 2019, a new reporting standard has taken effect for those businesses using accountancy framework International Financial Reporting Standards (IFRS). IFRS 16 Leases brings the reporting of operating leases onto balance sheets. This is expected to impact how businesses report on their fixed assets mainly via our Quarterly Acquisition and Disposal of Capital Assets Survey (QCAS), used in the compilation of gross fixed capital formation and business investment.

This change is contrary to how we treat operating leases within the National Accounts. To prepare, we are gathering data already freely available and speaking to survey respondents and international businesses to assess the potential impact of IFRS 16’s introduction. This will help us make a decision on how we treat any potential change in the levels of gross fixed capital formation in our Quarter 1 (Jan to Mar) 2019 dataset, to ensure that there is no impact on the UK’s National Accounts as a whole.

For the first time, we have published our latest estimates of business investment in current prices and chained volume measures broken down by asset type. Alongside these data, we have published an article, Business investment in the UK: analysis by asset to explore trends within business investment.

Between Quarter 3 (July to Sept) and Quarter 4 2018 (Oct to Dec), gross fixed capital formation (GFCF) fell by 0.6%, meaning GFCF fell in three quarters of 2018. The last time GFCF fell in three quarters of the same year was 2009.

On a sector basis, the largest negative contribution came from business investment, which contributed negative 0.5 percentage points. Private sector dwellings also made a negative contribution of 0.2 percentage points. This follows five consecutive quarters of this sector making positive contributions to GFCF growth. General government made the only positive contribution to GFCF growth, contributing 0.1 percentage points. Public sector dwellings and transfer costs and private sector transfer costs made no contribution to GFCF growth (Figure 1).

Between Quarter 4 2017 and Quarter 4 2018, GFCF decreased by 1.1%. Business investment contributed most to this decrease, contributing negative 1.4 percentage points while private sector transfer costs contributed negative 0.1 percentage points.

The fall in public sector dwellings was largely due to the reclassification of English and Welsh housing associations from the public corporations’ sector to the private non-financial corporations’ sector. However, other increases in private sector dwellings meant that this was only partially offset. General government made a positive contribution of 0.7 percentage points.

Falls in investment in information and communication technology (ICT) equipment and other machinery and equipment and dwellings meant that these assets contributed negative 0.5 and negative 0.3 percentage points respectively to the negative 0.6% decrease in gross fixed capital formation (GFCF) between Quarter 3 (July to Sept) 2018 and Quarter 4 (Oct to Dec) 2018. Other buildings and structures and transfer costs contributed 0.2 percentage points to GFCF growth (Figure 2).

Between Quarter 4 2017 and Quarter 4 2018, the largest contributions to the 1.1% GFCF fall came from ICT equipment and other machinery and equipment, which contributed negative 0.9 percentage points and transport equipment, which contributed negative 0.6 percentage points. Dwellings and intellectual property products also contributed negatively, contributing negative 0.3 and negative 0.1 percentage points respectively. Other buildings and structures and transfer costs partially offset these falls, providing the only positive contribution at 0.7 percentage points.

Quarter 4 2018 saw the largest fall in ICT equipment and other machinery and equipment compared with the same quarter a year ago since Quarter 4 2016. Further analysis of this asset can be found in Section 9 of this bulletin.

Between 2017 and 2018, business investment fell by 0.4%, following growth of 1.5% in 2017. The last time business investment fell compared with the previous year was 2016, when it fell by 0.2%. The last time business investment saw a larger fall was in 2009, when it fell by 16.6 percent compared with 2008.

The asset that contributed most to the fall in business investment in 2018 was transport equipment, contributing negative 1.8 percentage points. There is evidence to suggest that the recent falls in investment in transport equipment can be partially attributed to decreased investment in aircraft. More information on this can be found in the article Business investment in the UK: analysis by asset, published 29 March 2019. Information and communication technology (ICT) equipment and other machinery and equipment also made a negative contribution to growth in 2018, contributing negative 0.4 percentage points. Other buildings and structures and intellectual property products (IPP) contributed positively, adding 1.0 and 0.8 percentage points respectively (Figure 3).

In 2018, gross fixed capital formation (GFCF) grew by 0.2% compared with 2017, following growth of 3.5% in 2017. This is the lowest annual growth in GFCF since 2009, when it fell by 13.7% compared with 2008. Private sector dwellings made the largest contribution to growth in 2018, contributing 1.5 percentage points. This was partially offset by a negative 1.1 percentage point contribution from public corporations’ dwellings. This reflects the reclassification of housing associations from the public corporations’ sector to the private sector. General government contributed 0.2 percentage points, while business investment and private sector transfer costs both contributed negative 0.2 percentage points (Figure 4).

On an asset basis, intellectual property products made the largest positive contribution to GFCF growth, contributing 0.6 percentage points, while dwellings and other buildings and structures contributed 0.4 and 0.3 percentage points respectively. These increases were partially offset by transport equipment and ICT equipment and other machinery and equipment which contributed negative 1.0 and negative 0.1 percentage points respectively (Figure 5).

Investment in ICT equipment and other machinery and equipment has been broadly declining from its post-downturn peak in in Quarter 3 (July to Sept) 2014. Total gross fixed capital formation (GFCF) grew steadily from 2014 until 2018, where growth was broadly flat (Figure 6).

Annual GFCF by industry and asset data, available up to 2017, can be used to identify in greater detail what is behind the decline in investment in information and communication technology (ICT) equipment and other machinery and equipment since 2014. Between 2014 and 2017, investment in computer hardware fell by 20.2%. The industries that made the largest contributions to this fall were the retail trade (except of motor vehicles and motorcycles) and public administration and defence.

Other machinery and equipment, which makes up the majority of the ICT equipment and other machinery and equipment asset, fell by 4.3% between 2014 and 2017. The mining and quarrying industries made the largest contribution to the fall in this asset, followed by construction and electricity, gas, steam and air conditioning supply.

Gross fixed capital formation (GFCF) is now 11.1% above the UK economy’s pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008 and 34.4% above the level seen at the trough of the downturn in Quarter 2 (Apr to June) 2009. However, growth has weakened over the last two years, which can be partially attributed to the decline in business investment. Although GFCF increased in Quarter 3 (July to Sept) 2018, this can largely be attributed to an increase in investment by general government (Figure 7).

Public corporations’ dwellings made the largest negative contribution to GFCF quarter-on-quarter growth in Quarter 4 (Oct to Dec) 2017, Quarter 1 2018 and Quarter 2 2018. In Quarter 4 2018, private sector dwellings made a negative contribution to growth for the first time since Quarter 2 2017, having made positive contributions to growth in the other quarters of 2018.

Developments in the housing market can be an important indicator of investment and wider activity in the economy. The estimates in this bulletin incorporate data consistent with Construction output in Great Britain: January 2019 and new orders October to December 2018, published on 12 March 2019. The Construction output in Great Britain bulletin shows construction work decreased by 0.3% in the three months to December 2018. The most notable contribution to this decline came from private housing and non-housing repair and maintenance, while new work increased.

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 largely due to conceptual and methodological differences. More information about these can be found in the article Conceptual differences between an aggregate of construction output measures and the GFCF dwellings measure, published in June 2013. We are looking to update this article, with more information on the methodological differences, later in 2019.

Business investment fell by 0.9% between Quarter 3 (July to Sept) 2018 and Quarter 4 2018 (Oct to Dec), following falls of 0.6%, 0.4% and 0.6% in Quarter 1 (Jan to Mar) 2018, Quarter 2 (Apr to June) 2018 and Quarter 3 2018 respectively. This is the largest quarter-on-quarter fall since Quarter 4 2016. The last time business investment fell for more than three consecutive quarters was during the economic downturn of 2008 to 2009.

Figure 8 shows that the assets behind the fall in Quarter 4 2018 compared with Quarter 3 2018 were information and communication technology (ICT) equipment and other machinery and equipment and intellectual property products (IPP), which contributed negative 1.1 and negative 0.1 percentage points respectively. These falls were partially offset by other buildings and structures, which contributed 0.4 percentage points. Transport equipment made no contribution to business investment growth, having made contributions to business investment growth of at least 1.0 percentage point in each of the last five quarters.

Compared with Quarter 4 2017, business investment fell by 2.5%. This follows a fall of 1.3% in Quarter 3 2018 compared with Quarter 3 2017. This represents the largest fall in business investment compared with the same quarter of the previous year since Quarter 1 2010, when business investment was 3.8% lower than in Quarter 1 2009.

ICT equipment and other machinery and equipment made the biggest contribution to the 2.5% fall in business investment between Quarter 4 2017 and Quarter 4 2018, contributing negative 2.4 percentage points. Transport equipment and IPP also made negative contributions of negative 1.0 and negative 0.3 percentage points respectively. Other buildings and structures made the only positive contribution of 1.2 percentage points.

Figure 9 shows contributions to quarter on quarter business investment growth since Quarter 2 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 the largest 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 largely due to decreased aircraft investment. Further analysis can be found in the article Business investment in the UK: analysis by asset, published 29 March 2019.

Data on business investment by industry and asset show that no single industry has seen investment fall in all four quarters of 2018, despite total business investment doing so. In Quarter 4 (Oct to Dec) 2018, the largest contributor to the fall in business investment were the wholesale and retail industries, which contributed negative 1.0 percentage point. Private sector manufacturing industries contributed negative 0.5 percentage points, which was largely due to falls in the food, drink and tobacco and chemicals and man-made fibres industries.

The negative 3.4% fall in private sector manufacturing business investment in Quarter 4 2018 was largely due to a fall in investment in new building work, which contributed negative 2.7 percentage points, while transport equipment contributed negative 1.0 percentage point. Other capital equipment made a positive contribution of 0.3 percentage points. In Quarter 3 (July to Sept) 2018, private sector manufacturing business investment grew by 4.6%, with new building work making the largest contribution. Investment in transport equipment also made a positive contribution while other capital equipment subtracted from growth.

The falls in business investment for Quarter 1 (Jan to Mar) 2018 through to Quarter 4 (Oct to Dec) 2018 follow three consecutive quarter-on-quarter increases in 2017. Figure 10 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.

Between Quarter 3 (July to Sept) 2009 and Quarter 1 2015, business investment grew at a compound average rate of 1.5% per quarter, compared with negative 0.1% between Quarter 2 2015 and Quarter 4 2018. Business investment is now 0.3% above the level seen in Quarter 2 2016, the quarter in which the EU referendum took place.

The Bank of England, in its most recent Agents’ summary of business conditions, stated that “investment intentions eased further, with a growing proportion of contacts putting new capital investment on hold until there is greater clarity around Brexit”.

The Bank of England also noted in its February 2019 Inflation Report that “although weaker global growth may have reduced the demand for investment, it is unlikely to explain the marked weakness over the past year”, pointing to a “UK-specific factor depressing investment”.

The supply-side determinants of business investment point towards stronger growth than has been seen in recent quarters. The rates of return on capital, which have “remained robust” alongside the limited spare capacity in the economy, should encourage more investment.

In Quarter 4 (Oct to Dec) 2018, Japan had the strongest quarter-on-quarter growth in gross fixed capital formation (GFCF) of any G7 nation at 1.6%, followed by Germany at 0.9%. Of the G7 nations, only Canada experienced more negative growth in GFCF in Quarter 4 2018 (Figure 11).

The US had the strongest quarter on same quarter a year ago growth of the G7 countries at 4.5%. The next largest quarter on same quarter a year ago growth was seen in Germany where GFCF grew by 3.0%. The UK was one of two countries to experience a fall, with GFCF growth of negative 1.1% ahead of Canada, where GFCF fell by negative 4.7%.

Of the G7 countries, the US had the strongest growth in GFCF between 2017 and 2018, increasing by 4.9%. In contrast the UK grew by 0.2%, the slowest of the G7 countries. Figure 12 shows that this is below the average annual growth rate of UK GFCF, which between 2010 and 2018 was 3.2%, the second highest in the G7.

For more comprehensive comparisons of GFCF, please refer to An international comparison of gross fixed capital formation, published November 2017 and An analysis of investment expenditure in the UK and other Organisation for Economic Co-operation and Development nations, published 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 back to Quarter 1 (Jan to Mar) 2018, in line with National Accounts revision policy. These are mainly due to taking on later source data in addition to revisions due to seasonal adjustment.

The 0.1 percentage points Quarter 4 (Oct to Dec) 2018 downward revision to GFCF growth was mainly due to the incorporation of later and revised data from the Quarterly Acquisitions and disposals of Capital Assets (QCAS) survey, which affected the business investment component of GFCF. These data led to upwards revisions in Quarter 4 2018 in the transport asset in particular, which was revised up by 5.4 percentage points (Figure 13).

The incorporation of improved government estimates led to revisions in general government in the last three quarters of 2018. Quarter 4 2018 was revised down by negative 0.8 percentage points while Quarter 2 (Apr to June) 2018 and Quarter 3 (July to Sept) 2018 were revised up by 1.5 and 0.3 percentage points respectively.

On an annual basis, the 0.2 percentage points upward revision to GFCF in 2018 were mostly due later QCAS data, affecting business investment and transport in Quarter 3 2018 and Quarter 4 2018. General government was revised up by 1.0 percentage point.

Business investment was revised up by 0.5 percentage points in Quarter 4 2018 from the provisional 1.4% fall. Growth in Quarter 3 2018 was revised up by 0.6 percentage points while Quarter 2 2018 was revised up by 0.1 percentage points. Revisions to business investment growth were mainly due to revised and later data from the QCAS survey, 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 4 (Oct to Dec) 2018, the bias adjustment was positive £514 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 4 (Oct to Dec) 2018 revised survey results.