2018 CCF Victorian Infrastructure Outlook Report 1 | Page 33

Implications and Challenges
– A Victorian and National
perspective
Victorian economy has been relatively strong during
the post-mining boom era; however, the State does face
several challenges and risks. While the national economy
and “resource rich” states face a number of rather
different challenges of their own (mainly transitioning
away from a resources investment led boom to a less
labour intensive production cycle), Victoria’s risks stem
from exposure to trade exposed industries and resource
allocation during the construction cycle.
In the short term, investment cycles have large impacts on
economic growth – particularly via multipli ers affecting
the rest of the economy. Examples include when local
materials and labour are required to boost an economy’s
net capital stock. In the medium to long term, investment
cycles affect the sustainability of growth; that is, spending
on new productive capacity effectively creates the upper
bound for economic growth.
From a Victorian perspective, the infrastructure task is
high over the next five years, and challenges can lead
from rising costs of construction, particularly since the
construction phase within the state coincides with rising
construction activity nationally. A need to employ skilled
staff during this period will be a challenge particularly
when skill transferability is limited and the demand for
a certain skill set increases within the industry during
heightened periods of activity. In fact, this can become
a concern within the industry particularly if contractors
bidding for work are not cautious about rising costs and
fail to either disregard or factor in cost variability in the
bidding process. In the past, higher than anticipated cost
has eaten away margins placing at risk a contractor’s
operational viability. A factor in price is wage increases.
For Victoria, construction wage growth came through at
2.8 per cent for 2016/17 and is forecast to grow reflecting
the squeeze on prices across the economy. Stronger
construction activity in Victoria will ensure strength
in wages. Here, growth levels are set to experience an
acceleration from the current level of around 2 per cent
to 4 per cent over the next five years as the benefits of
increased construction activity are realised by workers.
The resources investment boom and bust – though not
focused in Victoria – has certainly affected the State
economy, and this was not costless.
In Victoria, the associated rise in the Australian dollar
drove a structural change away from dollar-exposed
industries and thereby weakening the economy. Now,
during the investment bust, the associated fall in the
Australian dollar is reversing that structural change away
from mining industries and regions and rebuilding activity
in dollar-exposed and services regions and therefore
positively impacting Victoria’s economy. Irrespective of
the benefits or otherwise of currently fluctuation, being
exposed to trade exposed industries will inevitably open
Victoria’s economy to challenges.
The pace of Victoria’s economic growth has eased over
the past year, after it accelerated over 2014/15 and
2015/16. While still strong, State Final Demand (SFD)
pulled back in 2016/17, after recording increasing growth
in the previous two financial years. Victoria, along
with New South Wales are currently the “high speed”
economies driven by much stronger levels of non-mining
investment, while Queensland, South Australia and
Western Australia remain in the “low speed” zone.
At the national level, resources investment is not expected
to reach rock bottom until 2018/19 when the total impact
of the $200 billion wave of LNG mega-projects finally
wash through. The downturn in resources investment
has provided other states that were badly affected by
the resources boom – such as New South Wales and
Victoria – an opportunity to resource their next round
of investment in infrastructure. For Victoria (and also
for New South Wales), tough decisions were made early
regarding the funding and financing of infrastructure
(including undertaking long term asset leases) so that
when economic conditions turned they were in a better
position to put projects into flight. These states also
have a much more diverse and balanced economic base
that benefitted from the lower post-boom dollar. As
growth in trade-exposed service sector employment
recovered alongside impressive plans for reinvigorating
infrastructure investment, population growth returned,
itself fuelling investments in housing and commercial
building and boosting State property tax revenues.
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