Business investment fell in Q1 of2022 by 0.6 % in the UK, while  the economy-wide measure of gross fixed capital formation increased by 3.8%

Business investment fell in Quarter 1 (Jan to Mar) 2022 by 0.6 %, while  the economy-wide measure of gross fixed capital formation (GFCF) increased by 3.8%. Business investment’s slower return to pre-coronavirus (COVID-19) pandemic levels, compared with that of GFCF, reflects the different patterns of investment by government and businesses observed throughout the coronavirus pandemic (Figure 1).

Figure 1: Business investment’s recovery has lagged behind that of economy-wide gross fixed capital formation (GFCF) since the coronavirus pandemic

UK business investment, chained volume measure, seasonally adjusted, Quarter 1 (Jan to Mar) 1997 to Quarter 1 (Jan to Mar) 2022

Though transport equipment has been revised upwards to an increase of 4.2% for Quarter 1 2022, transport remains the weakest asset in terms of returning to pre-coronavirus pandemic levels for both business investment and GFCF, as has been the case since Quarter 1 2020. Transport investment can be volatile because of the particularly large value of some transport items such as ships and aircraft. Transport has been particularly affected by the global shortage of semi-conductors. There has been some evidence of this easing, based on a reduction in respondent comments from the Quarterly Acquisition and Disposal of Capital Assets Survey (QCAS) referencing the semi-conductor shortage in Quarter 1 2022. Despite that fall in respondent comments, this continues to be a factor in availability of new vehicles.

Dwellings and government investment by contrast has returned to pre-pandemic levels since Quarter 3 (July to Sept) 2020. Investment in information and communications technology (ICT) equipment, and other machinery and equipment has also returned to pre-pandemic levels since Quarter 2 (Apr to June) 2021 and was 9.6% above its pre-pandemic level in the latest quarter.

This period coincides with availability of temporary tax relief on qualifying capital asset investment, known as “super-deduction”. Even though there are some differences in qualifying items, the impact of this incentive is most likely to be reflected in ICT equipment, and other machinery and equipment. However, there has been little reference to this temporary tax relief in respondent comments to QCAS. The Bank of England’s Agent’s Summary of business conditions for Quarter 1 2022 did report that because of the tight labour market, companies have increasingly sought to invest in automation to raise output, rather than expanding headcount.

Using data collated by the Organisation for Economic Co-operation and Development (OECD) from relevant national statistical institutes, we can compare gross fixed capital formation (GFCF) within the Group of Seven (G7) nations. GFCF data for the G7 nations relative to Quarter 4 (Oct to Dec) 2019, which is considered the pre-coronavirus (COVID-19) pandemic quarter.

The majority of G7 nations have now returned to positive growth relative to Quarter 4 2019  with Canada and the United States having had positive growth relative to Quarter 4 2019 as early as Quarter 4 2020, which has continued since that point.

GFCF for the UK has returned to positive growth relative to Quarter 4 2019 for the first time in Quarter 1 (Jan to Mar) 2022, having increased by 1.8%, which is below the G7 average of 3.6%.

Japan and Germany have yet to return to continued positive growth relative to Quarter 4 2019. Germany did achieve this in Quarter 2 (Apr to June) 2021 before returning to negative growth from that point.

France, Italy and the UK all saw their GFCF fall the most in Quarter 2 2020 having been heavily affected by the coronavirus pandemic at that point, but each have since returned to positive growth, with GFCF growth for Italy the strongest of the G7 nations, relative to Quarter 4 2019.