Unemployment’s up, house prices are stagnating. But is the Victorian economy doing as badly as it seems?
- Written by David Hayward, Emeritus Professor of Public Policy, RMIT University
The early 1990s in Victoria were tough. The economy was contracting severely, the population was shrinking, employment was collapsing and the unemployment rate skyrocketed to the highest in the land.
A long-term Labor government got the blame for allowing state debt to spiral out of control. Victoria, reckoned a popular joke at the time, was “Australia’s Mexico without the sunshine”.
Is it happening all over again?
Some reporting in national media would suggest it is.
The Australian Financial Review has recently run a series on the state, including a piece last week quoting business leaders saying the Victorian economy was in trouble.
Reference was made to the latest unemployment figures as supporting evidence. Victoria’s unemployment rate has risen over the last year, and at 4.4% is now the highest in the country. Rising numbers of company failures and stagnant house prices were also cited.
Earlier in the month, data showing a falling rate of Victorian business start-ups was highlighted, while another Financial Review article examined the decline in the number of conferences. All this was referred to as evidence of a state struggling under the weight of
$8.6 billion in levies [imposed] in [Labor’s] 2023 budget to curb a mountain of state debt that is forecast to reach $188 billion by 2028.
The Australian also ran a feature on Victoria echoing the same themes.
Readers were asked, “What the hell has gone wrong with Victoria?”. Public debt and taxation figured as prominent causes of an economic catastrophe in the making. The Australian deemed the state to be
at best, trapped in stagnation, forcing it to cover falling private investment and expenditure with ever greater public largesse. And at worst […] as the spending and debt build-up sets off the alarms, a vicious spiral is triggered […] until the whole Ponzi scheme collapses.
But are things that bad? What does the economic data actually show?
Some positive signs
It is true that unemployment in Victoria is rising, and is also high compared to the rest of the country. But it has been stable for the last four months, reflecting the impact of interest rate increases over the previous couple of years.
Also, looking back over the last 40 years, the increase has been from a very low base, and remains at an historically low level – and a long way off the highs of the 1990s.
The number of people in the labour force is continuing to grow at a healthy clip. The participation rate is now the highest on record.
Last month, the labour force increased in seasonally adjusted terms by 20,000, and almost all of these additional people ended up in employment.
The growth in employment since the end of the pandemic is notable.
Since January 2023, employment has increased by 268,000, or 8% in seasonally adjusted terms. That’s 37% of the jobs added in the whole of Australia during that time.
Yes, the share of job growth is falling, but it is still higher than the state’s population share, and it is from an unbelievably high base (55% of all jobs created nationally in July were in Victoria).
The Australian Financial Review acknowledged that the latest jobs data were indeed “unexpectedly strong”.
What about business insolvencies?
Victorian insolvencies are on the rise (up 61% in September compared to the same month last year). But so too are they across Australia, with the national number rising at a higher clip (up 70%).
What about the number of conferences in Victoria? We simply cannot be sure whether they are up or down, because there is no consistent data base to settle the matter.
And while Victoria may have fallen behind other states in the number of new startups per 1,000 businesses, the actual number of businesses has increased by more than 31,000, or 3%, since the beginning of the year.
How are house prices and rents holding up?
Yes, house prices are tumbling. In real terms, they are around 20% below their pandemic peak, at least partly caused by a bundle of new property taxes introduced in the 2023/24 state budget to help pay for pandemic-related debt.
But with housing affordability at an all-time low courtesy of high interest rates, that is no bad thing, especially for those keen to buy their first home.
That fall in house prices stands in contrast to a boom in rents over the same time period.
Over the last 12 months, median rents in Victoria have increased by 13.3%, and by 4.3% over the last quarter. In the March quarter, the rental stock fell for the first time on record, perhaps supporting those who see an economy in trouble.
But that fall amounted to barely 10,000 dwellings, or only 2.7% of the stock. Those properties had to be sold to someone, and it is likely many were sold to first time buyers who, in changing tenure, had no net effect on the rental market. A redistribution of wealth like that may be no bad thing.
Debt is high – but so is infrastructure spending
There is no doubt the Victorian economy has been slowing, as has the rest of the country. That is exactly the outcome sought by the Reserve Bank when it pushed up interest rates last year.
But there is little evidence to show Victoria is following the disastrous path of the early 1990s.
Back then, state debt grew alarmingly because of a savage recession. This time round, state debt has grown strongly, but largely to fund a construction pipeline on a scale the state has not seen before.
Infrastructure spending is now running close to $25 billion a year, almost five times what it was a decade ago. There’s a lot of jobs in those numbers, and shortly a lot of that infrastructure will come on line, boosting the state’s economic potential.
There is one other factor driving Victoria’s surprisingly resilient economy. Net international migration increased by 152,000 in the year to March 2024 – almost 30% of the Australian total – driven partly by the return of international students.
Very fast, migration-driven population growth is not being matched by increased output, and the state’s household income per person is continuing its long-term decline, leading some to argue it has become a “poor state”.
Treasurer Tim Pallas will hope that the increase stock of debt-funded infrastructure provides the productivity boost sorely needed to turn that around.
While on several indicators Victoria’s economy is slowing, this largely reflects a national trend. Drilling down into the data shows there are signs of growth, which suggest alarm at this stage is not justified.
Authors: David Hayward, Emeritus Professor of Public Policy, RMIT University
