2018 CCF Victorian Infrastructure Outlook Report 1 | Page 36

2018 Victoria Infrastructure Report
Overall, the key challenges facing the Victorian economy
are:
•
Further appreciation of the Australian dollar.
The 30 per cent depreciation of the Australian dollar
(against the US dollar) over the past three years is
providing a significant boost to the Victoria’s key trade-
exposed industries, namely agriculture, manufacturing,
international student education, tourism and some
business services. Although the dollar has risen to over
US76 cents recently, the overall improved competitiveness
should underpin further growth and investment. However,
should the Australian dollar appreciate in value, then the
Victorian economy will likely experience challenges as it
had during the mining boom when the Australian dollar
reached parity with the US dollar.
•
Population growth weakens further.
While picking up during 2015, population growth is
expected to trend downwards, falling below 2 per cent
annual growth from 2018 onwards. The increasing age of
the population and more dispersed nature of population
makes the provision of services typically more expensive.
This includes an increased reliance on the Commonwealth
Government for funding the provision of services as well
as infrastructure. Weaker population growth could also
be driven by interstate migration to resource rich states
such as Queensland and Western Australia if the mining
industry strengthens more than expected and earlier
than anticipated. Moreover, attracting skilled employment
should also be a priority, particularly in boosting Victoria’s
innovation, research and development industries.
•
Some of the recent and current drivers of growth
will weaken, or reverse, over the next two years, while
the next crop of growth drivers will be slow to gather
momentum including:
- After being a key growth driver over the past three
years, an emerging housing oversupply will lead to
declines in housing construction over the three years from
2017/18.
- Private engineering construction has declined sharply
over 2016/17 and is set for a further decline in 2017/18,
before turning around in later years (from 2018/19).
- Slower employment growth will see household
consumption expenditure weaken over the next two
years.
- Victoria is a net exporter of goods and services to other
states and will likely be affected by sluggish national
growth for the next 2-3 years.
- The end of domestic car manufacturing by Ford in
October 2016, and Holden and Toyota in October 2017
will have a significant negative impact on the entire
manufacturing industry. The shutdown of Hazelwood
power station in late March 2017 and issues with gas and
other electricity supplies will also have negative impacts
on manufacturing and potential investments in the state.
- Increasing energy prices can have a significant negative
impact on industry profitability, economic viability and
employment
•
Nationally, low productivity growth remains a
structural challenge to improved economic outcomes.
As highlighted by many economists (and successive
Reserve Bank Governors), Australia’s productivity
performance has been poor over the past decade, and
well below the much stronger rates of productivity growth
experienced during the 1990s. Indeed, much of Australia’s
economic growth in recent years (as weak as it is) can be
attributed to high population growth as opposed to being
smarter about the way inputs such as capital and labour
are being used in production. GNE growth has averaged
1.4 per cent per annum since 2011/12, but in per capita
terms, GNE has declined nearly 1 per cent over the same
period. Similarly, economic performance across Australia
is tending to move where the population is moving.
Ultimately, it is growth in productivity that provides the
space for sustainable increases in real incomes and living
standards, not economic growth per se.
•
Good public policy can play a crucial role in this
regard.
The return to growth in direct public investment in
infrastructure is helping to offset the ongoing downturn
in private investment at the national level. Although
Victoria’s private investment is predicted to remain strong
in the five years, positive impact on productivity is to
be had if projects are chosen wisely. A weaker growth
in public investment entrenches lower rates of growth
in domestic demand and employment in the short term,
and is not keeping up with the longer-term productivity
challenge.
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