2018 CCF Victorian Infrastructure Outlook Report 1

1. Victorian Economic Outlook Growth in the Victorian economy has outperformed the national average since the turn of the decade, with Gross State Product (GSP) and State Final Demand (SFD) 1 averaging 2.5 per cent and 2.9 per cent respectively since 2010. Recent growth has been notably robust, with SFD averaging 4.0 per cent over the past 3 years. Annual employment growth has averaged 2.8 per cent over the same period while the unemployment rate has typically tracked slightly above the national average. SFD is expected to moderate from recent strength over the next 3 years as the housing market cools and consumer spending is held back by weak growth in disposable household incomes. • In the most recent September quarter, growth moderated to 0.4 per cent quarter by quarter in seasonally adjusted terms, from around 1.6 per cent quarter by quarter over the March and June quarters. SFD is forecast to increase by 3.5 per cent in 2017/18 before decelerating sharply to 2 per cent in 2018/19. Overall, SFD is projected to average 3.2 per cent per annum over the next five years, which is still above the national average of 2.9 per cent; while GSP is predicted to average 2.6 per cent, slightly lower than the 2.7 per cent average for national GDP growth. In recent years, Victoria has recorded fastest population growth of any state. • Annual growth over the year to June 2017 was 2.3 per cent (2.4 per cent in 2015/16), compared to the national average of 1.6 per cent (1.5 per cent in 2015/16). Victorian population growth is expected to continue to outpace the national average, although the gap between Victoria and Australian growth will narrow over the next decade. Melbourne’s population has been growing at an outstanding rate and is one of the 10 fastest growing large cities in the developed world. Accordingly, BIS Oxford Economics is more optimistic about outlook on residential construction, and currently see the Victorian housing market as being in a small undersupply. Nevertheless, a downturn in residential investment is still approaching and we expect to see declines across 2018/19 & 2019/20. This downturn, in combination with weak wage growth restricting household’s ability and desire to spend, will be a drag on the economy over those two years. Offsetting this will be the continued pickup in public investment. • Over the past two years, the economy has been supported by strong levels of public investment, centred on telecommunication, transport, education and health projects. New public investment (i.e. excluding asset sales / purchases) grew 19.3 per cent in 2016/17 and the good news is that robust public investment will continue over the next two years. Yet the overall health of the state’s economy has been overshadowed by the closure of the automotive manufacturing industry. • The Toyota, Ford and Holden factories have closed; this will have flow on impacts for other industries along the supply chain. There were 24,600 people employed in the motor vehicle and parts manufacturing industry in 2015/16, equivalent to 0.8 per cent of total state employment and 9.2 per cent of total manufacturing employment in Victoria. While some parts makers will survive, jobs losses are expected to be significant. Other key points to Victoria’s economic outlook include: • Despite a range of risk factors (threats to global trade, North Korean Conflict), global economic growth is predicted to strengthen over the next two years, providing support to the Victorian economy. Indicators currently point to robust and stable activity in the world economy with world GDP predicted to grow at an average of 2.7 per cent over the next five years. Meanwhile, the Australian dollar is expected to depreciate over the short term – forecast to average around US$0.73 over 2018/19 & 2019/20, before gradually rising back toward US$0.80 in 2022, and averaging US75 cents in the longer term. This will ensure Victoria’s key exporting and import competing industries, such as education, manufacturing and agriculture remain internationally competitive. According to the Australian Bureau of Statistics’ Australian System of National Accounts: Concepts, Sources and Methods (Cat. No. 5216.0, 2015, pp481-482), state final demand (SFD) is the aggregate level of final consumption expenditure and gross fixed capital formation within a state over a specified period of time. It equals household final consumption expenditure (HFCE) plus government final consumption expenditure (GFCE) plus gross fixed capital formation (GFCF). In simple terms, SFD is the sum of private and public consumption and investment within a state, and is a measure of demand in a state economy. 1 9

2018 CCF Victorian Infrastructure Outlook Report 1 | Page 9