Victoria’s economic recovery is expected to continue through 2021. Business and consumer confidence are elevated, households overall have accumulated additional savings and monetary policy remains highly supportive.

Victoria’s economy is forecast to grow by 6.5% in 2021/22, with the economy expected to return to its pre-COVID-19 size by late 2021. Employment is expected to rise by 2.5% in 2021/22, while the unemployment rate will likely edge lower in the year, after an expected moderate increase in late 2020/21 due to the end of JobKeeper.

Annual Economic Growth

Employment conditions have varied significantly by region in Victoria during the pandemic. Metropolitan Melbourne and tourism-dependent areas of regional Victoria were particularly affected. The loss of international students and tourists particularly affected Melbourne, while tourism regions were also significantly affected by the closure of national borders.

Employment in both regional Victoria and metropolitan Melbourne rebounded strongly with the easing of public health restrictions. Overall employment in regional Victoria recovered more strongly than metropolitan Melbourne. Employment growth is expected to be more subdued over the coming year, as the strong rebound following the easing of restrictions gives way to more steady rates of increase.

However, some constraints on the recovery will remain. Restrictions on international travel will constrain service exports, including education and tourism, into 2022 and drive continued very low population growth.

Over the longer term, the current period of low population growth will have an enduring effect on the size of the Victorian economy. Population growth has been an important driver of Victorian economic growth in recent years, led by high levels of net overseas migration. Net migration is expected to remain subdued for some time with population growth is expected to slowly pick up, to reach around 1.7% by 2023-24.

Household consumption is forecast to make a large contribution to economic growth in 2021/22. After falling in each of the first three quarters of 2020, consumer spending rebounded strongly in the December quarter as public health restrictions were progressively eased. By the end of 2020, Victorian retail sales were above pre-COVID-19 levels. In part, the strong growth in retail spending likely reflects some substitution towards goods from discretionary services and overseas travel.

Business investment is forecast to increase significantly in 2021/22, reflecting a partial recovery from the large fall estimated for 2020/21. The longer-term outlook for business investment will be partly determined by how individuals and businesses adapt to structural changes following the pandemic.

Government spending is forecast to make another strong contribution to Victorian economic growth in 2021/22, reflecting ongoing high levels of spending by both the Victorian and Commonwealth governments to support economic recovery. The Victorian Government’s pipeline of transport and social infrastructure projects will continue to underpin high levels of public investment.

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