Insights

Victoria's economy and many social norms were upended in 2020, so what does this mean for the future?

Posted December 16, 2020

Author(s):

Julian Szafraniec

SGS Economics and Planning Julian presentation

^{This article summarises a presentation given by SGS Principal and Partner Julian Szafraniec at the Victorian Planning & Environmental Law Association’s, State Planning Conference in November 2020.}

What is the future of Victoria's economy and settlement patterns?

Before 2020 Melbourne had over 25 years of continuous economic growth. This economic strength attracted both international and interstate migrations, with Melbourne and Sydney combined capturing more than 50 per cent of Australia’s population growth for the past 10 years ^[1].

This growth reflects a long-running economic shift in the broader economy ^[2]. Victoria had a strong agricultural economy in the early 1900s and transitioned to an industrial economy in the mid-1900s. Now the Victorian economy is reliant on population and knowledge-based services sectors to drive growth and economic productivity. This includes the health, education, professional services, retail and hospitality sectors. The knowledge-based services economy has very different drivers to past economies; It thrives on highly connected, high amenity and diverse locations which have driven jobs growth into CBD locations.

SGS Economics and Planning Julian presentation chart 1

Source: Compiled by SGS from multiple ABS datasets

Dramatic changes to the economy and human behaviour

Human behaviour changed drastically and rapidly in 2020. We saw more dramatic shifts in work such as greater participation, shorter tenures, more casual and part-time work and the beginning of more flexible work practices.

Population growth slowed as overseas migration fell to zero and the Australian Government recently forecasted net overseas migration to be negative for the next two years ^[3].

For the first time in 10 years, Victoria had more people leaving the state than coming in during the second wave and stage four lockdowns. Interestingly, this exodus was still relatively small as most people who left Melbourne shifted to regional Victoria rather than leaving the state entirely ^[4].

SGS Economisc and Planning Julian charts2 03

Source: Population statement – Centre for Population

SGS Economics and Planning Julian charts2 04

Source: ABS - provisional internal migration estimates

Victoria’s economy has felt the direct effects of the strict and extended COVID-19 pandemic lockdowns which heavily restricted or prohibited many businesses from operating. The economy has contracted by 0.5 per cent in 2019-20 and the latest Victorian State budget estimates a four per cent contraction in 2020-21 ^[5].

The hospitality, arts, recreation and retail sectors were most impact by the lockdown ^[6], but the effects of the lockdown were not spread evenly across the state. The CBD and inner suburbs were the hardest hit, alongside regional areas dependent on tourism, particularly those that were also rebuilding from the bushfires which devastated these areas earlier this year.

In terms of foot traffic, workplaces are still 33 per cent below their baseline, and public transport is still 45 per cent below what it was pre COVID-19 ^[7]. Interestingly, public transport activity also remains very low in states which did not experience a second wave outbreak and prolonged lockdown. This suggests some major efforts are required to get people comfortable with mass transit post-COVID.

Despite the challenges, there are signs of recovery. Job advertisements starting to return ^[8] to pre-COIVD levels, and Google mobility data is showing increased activity in retail locations (85 per cent of baseline levels as of November 2020) ^[9], with supermarkets already back to baseline levels.

SGS Economics and Planning Julian presentation chart 4

Source: Google mobility data

What does this mean for Victoria’s future? Will things return to normal or never be the same again?

The future is still highly uncertain. Population and economic growth could bounce back within two years, as the latest Victorian budget suggests. However, we could also see continued slow population and economic growth driven by future outbreaks, vaccine issues, global uncertainty and other factors which could reduce Victoria’s population up to 500,000 people by 2031.

As the direct economic effects of the pandemic slow down, the lasting shifts are likely to be largely associated with the acceleration of trends already occurring in the economy pre-COVID:

Work will be increasingly flexible and fixed in terms of both time and location. As a result, people are likely to seek out living arrangements with more space to better enable remote work, while still being connected into the office and Melbourne economy. This could see a small shift out of Melbourne to high amenity regional areas within two hours of Melbourne.
Most commercial office workers will likely return to their physical office in some form during 2021; however, flexible working practices are probably here to stay. This means a trip into the office will primarily hold the purpose of connecting with people and so the Melbourne CBD (and similar locations) will remain highly attractive. At the same time, suburban centres will see new opportunities to support this more flexible way of working. In addition, the combined effect of more flexible work practices (i.e. working from home a couple of days a week, reduced expectations around 9-5 working hours) could have profound impacts on the transport system which is highly geared toward large commuter flows.
The retail and hospitality sectors have been hit hard in 2020, while some segments such as supermarkets and garden/hardware supplies have thrived. Rebuilding the sector will take significant time and business will have to adapt to changing economic and consumer trends. During the lockdowns, all consumers have been exposed to online shopping resulting in an accelerated trend that was already impacting the sector. Businesses will need to embrace the opportunities of online retailing to survive, while physical retail will need to focus on providing an enhanced experience and service to give shoppers a purpose to visit.
With vulnerabilities in key supply chains exposed during the lockdowns and increased global uncertainty, we may also see a shift away from international manufacturing and greater self-sufficiency in local manufacturing. This will be driven by high skilled advanced and innovative manufacturing (i.e. 3D printing and automation) rather than traditional low skills manufacturing of the past.
Recovery and prevention programs will likely lead to further investment in health services from research, pharmaceuticals, hospitals, and other services. This will further reinforce health as the largest growth sector in Victoria and present opportunities around major assets nodes (i.e. hospitals) but also in local centres for GPs, gyms and aligned services.

References

^{[1] ABS regional population data https://www.abs.gov.au/statist...}

^{[2] Compiled by SGS from multiple ABS datasets}

^{[3] Population statement – Centre for Population https://population.gov.au/publ...}

^{[4] ABS – provisional internal migration estimates https://www.abs.gov.au/statist...}

^{[5] https://www.budget.vic.gov.au/}

^{[6] SGS analysis: https://www.sgsep.com.au/publications/insights/the-economic-impact-of-covid-19-and-bushfires}

^{[7] Google mobility data https://www.google.com/covid19...}

^{[8] IVI data, National Skills Commission}

^{[9] Google mobility data https://www.google.com/covid19...}

Author(s):

Julian Szafraniec