The outlook for the Victorian economy is positive with robust household and business balance sheets, and a planned increase in business investment, will underpin strong economic growth in 2022/23. Growth will also be supported by high levels of government infrastructure investment.

The Victorian economy is forecast to grow by 3.25% in 2022/23 following growth of 5.5% in 2021/22 amid the economy’s recovery from the effects of the COVID-19 pandemic.

Annual Economic Growth

Total employment across Victoria has risen by 280,000 people since the trough in September 2020 with full-time employment well above its pre-pandemic levels. Looking ahead, employment is forecast to grow by 1.75% over the 12 months to June 2023.

The unemployment rate is at 4%, the lowest since current records began, and the underemployment rate, which reflects employed workers who want to work more hours, is at its lowest level since 2002. In regional Victoria, the unemployment rate is around a record low at 3.2%. Unemployment is forecast to remain around its low levels over the next 12 months.

Consumer spending is expected to be the largest contributor to growth in 2022/23, with strong growth in private business investment also making a significant contribution. A high level of savings is expected to support consumer spending even while consumers face some headwinds from expected rising interest rates and higher petrol prices. The household savings rate is also expected to continue to decline to more normal levels, with a greater share of income being spent.

Beyond 2023, the outlook for spending remains more uncertain than usual. Asset price growth has eased, although this follows a period of strong price growth for both dwellings and equities. Consumer confidence has also fallen recently amid rising inflation, the prospect of higher interest rates and elevated global uncertainty. Real income growth will also be constrained by higher consumer inflation. Against this backdrop, consumers may become more risk-averse and keep a higher rate of precautionary savings.

Dwelling investment is forecast to increase modestly in 2022/23, following an expected solid rebound in 2021/22. Activity will be underpinned by a large pipeline of work that has been supported by record-low interest rates and government incentives that generated a surge in approvals to build detached houses during 2020/21. In addition, approvals for apartments and other attached dwellings have increased somewhat amid a reduction in rental vacancy rates and an increase in dwelling prices.

An expected rise in interest rates is anticipated to dampen house prices and demand for new housing in 2022/23. Growth in construction activity is therefore expected to ease in the second half of 2022/23 but remain at elevated levels.

Business investment is forecast to continue growing in 2022/23, building upon strong growth in 2021/22, following pandemic-driven falls in 2020/21. Engineering construction activity is expected to remain at high levels due to the elevated pipeline of work yet to be done, especially for transport and energy construction. Non-residential building construction will also be supported by a strong pipeline of activity. In the short term, however, shortages of materials, skilled labour and rising input costs could constrain non-residential construction output.

Victoria’s population growth is forecast to pick up to a moderate rate of 1.2% in 2022/23 as net overseas and interstate migration begins to recover. Beyond 2023, population growth is expected to return to around the average growth rate of the past two decades as migration patterns normalise.

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