What's Powering Philippine GDP Growth? Construction is at a 20 Year High

Construction, both Public and Private, is definitely firing on all cylinders. For the entire 2018, Construction Gross Value as a Percentage of GDP reached 13.47% - the highest it's ever been since 1990, some 28 years ago.

Cumulative Construction Overhang, which measures how far Construction GV is above its historical trend, is now at 6.52% of GDP, more than what it was from 1990 to 2000, the previous boom years.

Private Construction as a Percentage of GDP is at an acute high - 9.62%. The cumulative overhang is even more acute - 5.31% in 2018.

Public Construction is only beginning to break out of its doldrums. Public Construction GV reached 3.85% of GDP, just slightly above the previous high of 3.81% in 1998 - in the height of the Asian Financial Crisis.

As a result, the Cumulative Overhang in Public Construction is much much more muted, only 0.55% of GDP, still way below the ratio from 1998 to 2002.

Public Construction, namely infrastructure, has room to grow. Public infrastructure begets private infrastructure,  and power Private Construction to new highs.

Philippine Public Construction as a % of GDP is at a 20 Year High! - As of September 30, 2018

Philippine Public Construction as a % of GDP is at a 20 Year High! - As of September 30, 2018

Philippine Public Construction is way above its historical trend of 3.40% of GDP. As of the third quarter of 2018, Philippine Public Construction Gross Value as a percentage of GDP hit 4.15%. This is the highest ratio since 1998.

This boost in public construction, particularly in infrastructure, has led to the first cumulative overhang since 2003. 

As long as infrastructure spending is not done in white elephants, such as China's famous bridges to nowhere, this bodes well for the Philippine economy because the fiscal multiplier from such projects is very significant and will increase efficiencies in the entire Philippine economy.

Construction Gross Value as a Percentage of GDP Is Near All Time Highs! - Updated as of 2nd Qtr 2018

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.59% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 2nd Qtr of 2018, Construction GV as a percentage of GDP now stands higher at 13.58% of GDP - up from an all-time high of 12.61% posted in 2016. But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 6.8% above equilibrium.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Private construction as a percentage of GDP seems to have leveled off from its all time high. As of 2018 Q2, this ratio now stands at 8.97% of GDP, down from a high of 9.23% of GDP as of 2016.

The overhang in private construction continues to climb. It's now 5.16% of GDP as of the 1st Half of 2018.

So what's driving the overall upward momentum? Two words: Public Construction. Public construction gross value jumped substantially in the 1st half of 2018. It's now 4.61% of GDP, way above any level it has seen in the last 20 years.

Based on the graph of the cumulative overhang in public construction gross value, the Philippines seems to have been substantially underinvesting in public infrastructure from 2010 to 2017. The overhang now stands at 0.90% of GDP - levels not seen since the 1990's.

This bodes well for the country because a massive uptick in public construction usually involves public infrastructure, whose multiplier effect is substantially more than private construction. For example, a bridge or road benefits the general population, while a residential building or mall usually just benefits tenants and consumers within the locality.

Moreover, as private construction ticks down, public construction is poised to pick up the slack and maintain the GDP growth of the country.

Construction Gross Value as a Percentage of GDP Is Near All Time Highs! - Updated as of 1st Qtr 2018