Business investment in the UK: October to December 2015 revised results

1. Understanding the data

Short guide to business investment

Gross fixed capital formation (GFCF) is used in the compilation of the UK National Accounts’ expenditure measure of the second estimate of gross domestic product (GDP) at month 2 and the Quarterly National Accounts (QNA) at each calendar quarter. It is an estimate of net capital expenditure by both the public and private sectors. Examples of capital expenditure include spending on machinery and plant, transport equipment, software, new dwellings and other buildings, and major improvements to existing buildings and structures, such as roads. The additional assets research and development and military weapons systems were introduced in the Quarter 2 (Apr to June) 2014 revised results , published November 2014, consistent with the European System of Accounts 2010, and with the UK Annual National Accounts (Blue Book) 2014.

Business investment estimates are a short-term indicator of net capital expenditure by businesses within the UK, at current prices and chained volume measures, both seasonally and not seasonally adjusted. Business investment is one component of GFCF. Business investment estimates exclude expenditure on dwellings and the costs associated with the transfer of ownership of non-produced assets, and capital expenditure by local and central government.

Interpreting the data

When making comparisons it is recommended that users focus on chained volume, seasonally adjusted, estimates as these show underlying movements rather than seasonal movements, and have the effect of changes in prices removed.

Use of the data

Estimates from this release are used by the ONS, in the compilation of the UK National Accounts, the Bank of England and Her Majesty’s Treasury to monitor economic performance and inform monetary and fiscal policy decisions. Business investment is also used by other government departments, such as the Department for Business, Innovation and Skills. In addition, these estimates are frequently used by the business, education and research communities, the media and the general public.

2. Forthcoming changes for the Blue Book 2016 publication

Blue Book 2016 changes

1. In June 2016, we will publish revised figures for the UK national accounts, including gross domestic product (GDP) and balance of payments.

Changes will be made in line with international standards adopted by all European Union (EU) member states and with worldwide best practice. These, and additional improvements we are making, will ensure that our national accounts continue to provide a reliable framework for analysing the UK economy and comparing it with other countries.

The improvements made in June 2016 can be broadly split into 3 categories:

1. methodological improvements which impact on GDP; these include improvements to the data sources and methods used to estimate imputed rental and improved estimates of non-complicit value added tax traud,

2. improvements and corrections which do not impact on GDP; these include changes to the treatment of non-market output and social transfers in kind, incorporating the latest FDI benchmark, a correction to the measurement related to second homes and a correction/improvement to the measurement of shares and bonds,

3. other regular improvements and methodological changes; as detailed in the Impact of Blue Book 2016 changes on chained volume measure gross domestic product, 1997 to 2011 article.

We are publishing a series of articles in the lead up to publication on 30 June 2016 and these can be found on the National Accounts articles page on our website.

Additionally, an error has been identified during further quality assurance of the GFCF dataset published as part of our annual Blue Book publication on 30 September 2015. The affected series are NPEL, L636, NPQT, DLWL, DLWO, DLWT, NPEN, L62K, NPQR, DLWJ, DLWM, DLWQ, NPEK, L62T, NPQS, TLPX, TLPW, EQED, NPEM, L5ZQ, NPQX, DLWZ, DLXI, EQEC and their associated growth rate series. Higher level aggregates, including GDP, are also affected. These will be corrected as part of the annual Blue Book 2016 publication.

3. Methods

Details of the business investment methodology are published in the Quality and Methodology Information report. This report describes the intended uses of the estimates presented in this publication, their general quality and the methods used to produce them.

On 19 May 2015 we published several articles explaining the changes that were implemented in the UK National Accounts (Blue Book) 2015, published on 30 October 2015. These articles describe changes related to meeting ESA 1995 requirements. These include changes that impacted 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).

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.

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.

Definitions and explanations

Current price (CP)

Current prices are the actual or estimated recorded monetary value over a defined period. They show the value for each item expressed in terms of the prices of that period.

Deflation and chained volume measure (CVM)

Investment is measured across several time periods. The values measured will include both the change in the volume of investment and the effect of the change of prices over the period. Deflation is the process whereby the effect of price change is removed from a set of values.

Deflation can be done simply by dividing a current price estimate by a deflator, which measures the movement in prices. Doing this creates a constant price series. For deflators to accurately measure the movement in prices they need to accurately reflect changing investment habits. We do this by rebasing deflators.

Rebasing deflators has a significant effect on a constant price series and would cause significant revisions to the investment data. To avoid this it has been the standard to not rebase deflators annually. This, however, means the deflators are not accurately measuring price changes.

To resolve this we estimate volumes using chained volume measures, which are derived by linking together (compounding) movements in volumes; calculated using the prices of the previous financial year; and applying the movements to the current price estimates of the reference year. This allows us to remove both the effect of prices and rebasing.

Seasonally adjusted (SA)

Seasonal adjustment aids interpretation by removing effects associated with the time of the year or the arrangement of the calendar, which could obscure movements of interest.

Asset and sector hierarchies

The diagrams show the institutional and sector hierarchies for GFCF, as set out by the European System of Accounts 2010. The asset hierarchy for business investment is also set out. Business investment is not an internationally defined concept, and the UK’s estimates cannot be compared with those of other countries due to definitional differences.

A full list of sector codes, for example S.11001 = public corporations, is available in the reference tables.

Institutional sector hierarchy

Source: Office for National Statistics

Download this image Institutional sector hierarchy

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Gross fixed capital formation asset hierarchy

Source: Office for National Statistics

Download this image Gross fixed capital formation asset hierarchy

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Business Investment by asset

Source: Office for National Statistics

Download this image Business Investment by asset

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4. 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

British Nuclear Fuels Ltd (BNFL)

In April 2005 nuclear reactors were transferred from British Nuclear Fuels Ltd (BNFL) to the Nuclear Decommissioning Authority (NDA). BNFL is classified as a public corporation in National Accounts and the NDA as a central government body. The capital formation estimates in this release reflect this transfer from the public corporations manufacturing category. The value of the transfer was negative £15.6 billion. The negative value reflects the fact that the reactors are at the end of their productive lives and have large decommissioning and clean-up liabilities. This shows up as a prominent trough in Quarter 2 (Apr to June) 2005 in the general government series, and a complementary peak in Quarter 2 (Apr to June) of the business investment series, which includes investment by public corporations (except dwellings and transfer costs). A more detailed explanation about the transfer can be found in the December 2006 Business Investment release.

Aircraft imports

On 1 January 2011 a change was made to the zero-rating of VAT on qualifying aircraft. More information on this can be found on the HMRC website. This may have contributed to the high level of aircraft imports for Quarter 4 (Oct to Dec) 2010 and the low level of aircraft imports for Quarter 1 (Jan to Mar) 2011.

5. Other relevant sources of data

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 Corporation’s (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
• Retail Sales - monthly estimate of UK retail sales
• UK Manufacturers' Sales by Product (PRODCOM) - annual output by manufacturers
• Labour Market Statistics - monthly data on employment, unemployment, economic inactivity, claimant count, average earnings, labour productivity, vacancies and labour disputes
• Business Demography – annual statistics on UK business births, deaths and survival

6. Feedback

We welcome your feedback on the business investment release and data. Please contact gcf@ons.gov.uk. You can also engage in discussion about business investment, and, share information with other users or producers of financial and economic statistics by visiting the Financial and Economic Statistics User Group on the Royal Statistical Society’s StatsUserNet discussion forum.

7. Accessing data

Time series used in this bulletin and time series datasets carry unique identifiers for ease of use. More information on these identifiers is available in the article published on 25 August 2011 New series identifiers for GDP(O), IoS and IoP and GCF.

8. Code of Practice for Official Statistics

National Statistics are produced to high professional standards set out in the Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference.