Gain, pain, the whole cycle again
Optimism for the future of the state must be balanced by hard work.
Optimism for the future of the state must be balanced by hard work. LONG-TERM gain, short-term pain. Possibly medium-term pain as well, possibly not, depending on how much we invest in new infrastructure. But the gains will come if we get the policies right.That sums up the economic forecasts for Victoria from the Victoria at the Crossroads conference, co-hosted last week by Victoria University, the Committee for Melbourne and The Age. Opinions differed, as always, but the striking message from the conference was optimism about Victoria in the long-term, despite the discouraging surveys and data.The balance between pain and gain will depend largely on three factors: the strength of the dollar our willingness to pay to build the infrastructure we need and whether we adopt productivity gains so that our firms see out the short-term pain and survive to reap the long-term gain.Let's start with the long-term trends, because they are less well-known. In the past 60 years, Victoria has already gone through two revolutions as the industries that dominated its past agriculture and manufacturing receded. Yet new service industries have mushroomed to replace them.In 1989-90, manufacturing generated 19 per cent of Victoria's output by 2010-11 it was less than 10 per cent. Victoria used to be Australia's manufacturing capital that's gone, as hundreds of textiles, clothing and other factories shut their doors, replaced by imports from China. South Australia and Tasmania are now more dependent on manufacturing than Victoria.In their place are booming service industries. In 25 years, the number of Victorians working in professional, scientific and technological firms has trebled. Our health and welfare workforce has more than doubled, to be our main source of employment. Our construction workforce has doubled, as has the workforce in cafes, hotels and restaurants. The arts and entertainment sector is the fastest-growing of all, and education, too, has boomed.And while manufacturing halved as a share of Victoria's output, the finance and professional/scientific sectors doubled, from 11 per cent of output in 1989-90 to 22 per cent in 2010-11. As the home of the industry superannuation funds, Melbourne is now the funds management capital of Australia. We have built strengths in areas that matter for our long-term future.The five industries in which Victoria has its largest share of Australia's output are: Arts and entertainment. Professional, scientific and technical services. Education and training. IT, media and telecommunications. Finance.Hardly a list of rustbucket industries, is it? Add in our demographic divergence Victoria specialises in tertiary students, people aged 20 to 44 and migrants speaking foreign languages and you see why there is confidence in the state's long-term future.Then why is Victoria doing poorly at present? State Treasurer Kim Wells gave a good summary of the three structural changes weighing on us, even if he refused to admit the damage they are doing.First, in the post-GFC world it is harder to win the trust of investors. In a significant aside, Wells noted: "This has implications for the financing of large infrastructure projects."Second, consumers have grown more cautious. Yet so far, they have barely begun the task of deleveraging. In a generation, household debt grew from 37 per cent of disposable income to 156 per cent but in five years since, it has shrunk back only to 150 per cent, as households took on $450 billion of new debt. That debt burden is hurting, and it will weigh on house prices and consumer spending for years.Third, the rise of China and India has created a mining boom that has pushed our dollar way above its past levels and out of line with most measures of fair value. As Wells put it: "No one should underestimate the scale of this challenge to existing business models . . . Not every business model will survive."Every week brings more reports of businesses folding. By 2016, observers expect, they will include what used to be Victoria's biggest manufacturing enterprise: making the Ford Falcon. The high dollar, too, will weigh down on our future.But Asia's growth also brings opportunities. Wells noted that Victorian firms also gain from the mining boom, and was one of many to highlight the potential for our agricultural, manufacturing, tourism and knowledge industries to service the growing demand from Asia's middle class, for quality food, goods and services.The problem is that to reap that benefit, we must regain the competitiveness the high dollar took away. If we can't change the dollar, we will have to make dramatic changes to workplace productivity and relative labour costs.So what should the state do? The consensus was: keep its fiscal house in order, and build more infrastructure. But they are hard to reconcile.Wells argued Victoria had chosen its next infrastructure projects, led by the East-West tunnel link, the first stage of the Melbourne Metro, and the container port at Hastings. But he conceded they would require investment on a scale the state could not provide while keeping its AAA rating.We heard many ideas on how to pay for it, but to my mind, no solutions. We need to debate that, not with partisan rants, but with what Elizabeth Proust called "a civilised dialogue": Victoria at its best.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free