Victoria’s economy has been resilient to global cost-of-living pressures and elevated interest rates over the past two years, and growth in economic activity is expected to continue gathering pace over coming years. The Victorian economy is forecast to increase to 2.50% over the next 12 months, up from growth of 2.0% over the 12 months to June 2025.

Household consumption growth is forecast to improve over the next 12 months, supported by stronger growth in real household incomes. This follows a period of subdued spending growth, as high cost-of-living pressures and restrictive interest rates have weighed on household budgets. Over the past year, the weakness in spending has been led by discretionary goods and services, including purchase of vehicles and spending on recreation. Spending on some essentials has nonetheless been weak – notably spending on food, as consumers in aggregate traded down to cheaper items.

Victorian Economic Growth

Business investment is expected to continue to grow in coming years, though moderating from its recent high growth rates. Business investment growth has been strong and broad-based in recent years. Machinery and equipment investment has accelerated in recent years, recovering quickly from pandemic-related supply chain disruptions and increasing to record levels. Growth in engineering construction and non-dwelling construction with the pipeline healthy, which should continue to support business investment in coming years.

Dwelling investment is forecast to increase, supported by a further easing in industry capacity constraints and an increase in demand for new housing. As labour constraints have begun to gradually ease from the latter part of 2024, the residential construction sector is working through a backlog of projects. This has resulted in an increase in the amount of residential construction activity underway. Slower growth in building costs, and an anticipated increase in the price of established dwellings, are expected to make it increasingly attractive to build a new dwelling relative to purchasing an existing home. This improvement in demand for new dwellings, alongside an elevated pipeline of work to be done, supports the outlook for stronger growth in dwelling investment over the next 12 months.

Employment is forecast to grow at a lower rate of 0.50%, following 2.5% growth over the past 12 months. The unemployment rate is expected to rise marginally to 4.75% in mid-2026, as growth in the workforce exceeds growth in employment. However, this unemployment rate remains lower than the 20-year average.

Victoria’s population growth has eased after two years of strong increases. International student arrivals have eased and returned to around pre-pandemic levels, partly due to policy changes in the Commonwealth’s Migration Strategy, including stricter student visa requirements. Population growth is expected to return to its long-term trend of 1.7% in coming years.

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