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Ruth Williams, Tim Colebatch, Craig Butt and Mark Hawthorne
March 17, 2012
Victoria’s economy rode out the global financial crisis reasonably unscathed, but the inevitable bumps in the road have begun to take their toll.
MATT Hampton can drive around his home town of Nyora, in Gippsland, and point with pride at sheets of metal he made while working at BlueScope Steel’s Hastings plant.
Hampton, 38, worked for 15 years at BlueScope, until late last year when he was ordered into a room and offered one of hundreds of redundancies announced by the company in August. He decided to get out – while ”the going was good”.
“We were a bit dumbfounded,” Hampton says. ”Nobody ever saw that kind of thing coming.”
But since finishing in October, Hampton has looked for work in his local area without success. Some of his former colleagues have tried their hands at small business, some have tried the mines, some are still ”twiddling their thumbs”.
Hampton plans to look for work in other parts of the state – or outside the state altogether. “I’ve lived in Victoria all my life and I love Victoria, but if I have to move to another state, so be it,” he says. ”It’s the state that’s going to suffer.”
The state, it seems, is already suffering.
More signs of Victoria’s economic slowdown.
In recent weeks, Victorians have been bombarded with a string of bad news, as the state tries to survive and prosper in the shadow of a mining boom that, while physically concentrated in a few pockets of the country, is reshaping the national economy.
In the six months to February, Victoria lost a net 27,700 jobs, according to the Australian Bureau of Statistics. In the year to February, Victorian unemployment has risen from 4.8 per cent to 5.4 per cent, 0.2 percentage points higher than the national rate.
The latest national accounts – released last week – suggest Victoria is close to joining South Australia and Tasmania in recession, with spending in the state declining 0.4 per cent in the second half of 2011.
On Thursday, the Baillieu government revealed a plunge in taxation revenue, driven by the damp consumer confidence that is hurting retailers and a housing market now receding after defying the gloom for so long.
Meanwhile, the stunning strength of the Australian dollar, a byproduct of the boom, is punishing Victoria’s still-substantial manufacturing industry, eroding the retail sector, deterring foreign students and tempting tourists away from domestic destinations.
For the first decade of this century, Victoria consistently outperformed the other south-eastern states. It built more new homes than any other state, providing affordable new homes on its fringe, particularly in the west, and it attracted the largest share of foreign students.
Melbourne became seen as Australia’s cool city, attracting tourists and interstate migrants, and it expanded rapidly in high-value services sectors, such as finance and the professions.
But in the past year, those sources of growth have shut down. Housing starts have shrunk from 16,000 in the September quarter of 2010 to 12,000 15 months later. Foreign student numbers have fallen alarmingly, especially from India. Tourists are going overseas and manufacturing jobs – and now office jobs – are starting to follow them.
Yet the Baillieu government remains determinedly confident. It insists its strategy of cutting costs, including 3600 public service jobs, to ensure a budget surplus of at least $100 million is the best way for the state to navigate the downturn, in part because it will protect the state’s triple-A credit rating.
“The volatility of the global economy is being felt in Victoria,” state Treasurer Kim Wells said this week. ”However, the state is meeting these challenges head on.”
Not all agree. This week, prominent company director Elizabeth Proust said the government should be investing more in the state’s crowded transport infrastructure and queried the wisdom of cutting thousands of public servants when the state is already losing 1000 jobs a week.
Her comments echoed the sentiments of transport magnate Lindsay Fox, who told The Age last week that the political imperative for surpluses should not precede the need for better infrastructure to create wealth and boost employment. ”My biggest concern is that by the end of the year we’ll have probably one of the highest rates we’ve seen of unemployment for years,” he said.
More than 2700 Victorian companies entered external administration in the 12 months to January, up almost 10 per cent on the previous 12 months. And Victoria’s population growth, which helped keep the economy expanding in recent years, has slowed from 2.25 per cent in 2008-09 to 1.5 per cent in 2010-11.
Statewide, the economic picture is not uniform. ”There are people who are doing very well,” says Ian Carson, chairman of partners at PPB Advisors, a professional advisory and insolvency firm.
Carson says PPB – which also helps ”turnaround” troubled operations – has been busy, especially with businesses exposed to the high dollar. ”We have been busy for four years,” he says. But those who are ”pro-active” are surviving. ”There are many examples of people who are prospering.”
But in CBD offices, in suburban shopping centres and high streets, in outer industrial strips and in rural towns, pessimism seems to be setting in.
”People buy fear,” says leading business figure David Smorgon. ”You can fall into a trap that everything is negative, everything is pessimistic and there is a loss of hope in the community. We are in that cycle of fear.”
Months of bad news out of Europe has helped sap the confidence of many Victorians; a Victorian Employers Chamber of Commerce and Industry survey – carried out in the three months to December and published last month – found just 17 per cent of businesses expected the state’s economy to strengthen during 2012, while 40 per cent expected it to weaken.
”For many businesses, the environment is one of uncertainty. There’s no doubt jobs are under pressure,” says Steven Wojtkiw, chief economist at VECCI.
Yet uncertainty is perhaps the best description of where we’re at. The latest National Australia Bank index of business conditions has Victoria at zero, implying that equal numbers of firms are experiencing growth and decline. The NAB’s index of business confidence in the state was only slightly worse, at minus two.
Similarly, the Westpac-Melbourne Institute index of consumer sentiment for Victoria in March was 98.4, meaning pessimists only slightly outnumbered optimists. That was a sharp change from 105.5 a year ago and 115.5 two years ago, but it was the second best of any state, if a long way behind top-placed Western Australia (107.0).
In Collins Street high-rises, financial services firms are weary after four years of unprecedented market volatility. Banks have struggled to find people to lend to, insurers have been hit with high re-insurance costs – both sectors have announced thousands of job cuts, many in Melbourne. Stockbrokers, too, are limping, with Australian shares – although posting a positive few weeks – failing to rebound as strongly as in other markets.
”The last few years have been as tough as I can ever remember,” says Terry Campbell, the senior chairman of Goldman Sachs in Australia.
A series of retail collapses – Fletcher Jones, Brown Sugar, RED Group, Colorado – have illustrated the impact of wilting consumer confidence on the state’s second-biggest employer.
News of the state’s economic slowdown has come as a shock – partly because Victoria kept ploughing on through the aftermath of the global financial crisis, its employment and housing markets staying strong.
Retail jobs, for example, surged by more than 20,000, or 8 per cent, in Victoria in the three years to February 2011, on a year-average basis. Jobs in the accommodation and food sector rose more than 15 per cent, and construction rocketed 17 per cent.
Meanwhile, as Perth house prices dropped and Brisbane’s trod water, house prices in Melbourne climbed by more than 10 per cent in 2010, making the post-GFC dip a vague memory.
But something shifted over the past 12 months. Over the year to February 2012, the state lost 38,500 jobs in retail and 6300 in the hospitality sector, on the raw figures released by the ABS this week. On a year-average basis, to smooth out the volatility in the figures, the loss was about 13,000 retail jobs and 12,000 in the hospitality sector.
Jobs were gained in finance, the health and welfare sector and professional and scientific services, and construction appears to be holding up, with 3000 jobs added over the past year. But established house prices in Melbourne have dived more than 6 per cent.
”Victoria epitomises the divergence in fortunes between resources-rich states and the rest of the country,” says Saul Eslake, chief economist at Bank of America Merrill Lynch.
”To some extent, the weakness in Victoria in recent months owes something to recent strengths. What I think is happening is that Victoria staged a faster recovery in employment after the global financial crisis – possibly because Victoria derived more benefit from some of the [federal government's stimulus spending], especially the stimulus applied to housing.
”Now that the stimulus is wearing off and governments are tightening fiscal policy, and because Victoria, almost by definition, is more exposed to the exchange rate, Victoria is now doing worse than the rest of the country.”
The high dollar is accelerating the restructure of Victoria’s economy that began three decades ago, as the state began its transformation from a manufacturing powerhouse to a services centre.
But although its share of the state’s economy has almost halved, manufacturing remains significant in this southern state. It is still the state’s second-biggest force, even as its share of the state’s economy has declined from 15.5 per cent 20 years ago, to 8.6 per cent of gross state product last financial year.
Finance is now Victoria’s lifeblood, expanding from 5.3 per cent of gross state product in 1990-91 to 12.2 per cent last financial year.
Since 2008, finance jobs have jumped by almost 10,000 to 118,000, analysis by The Age shows. Over the same period, some 27,000 Victorian jobs were lost in manufacturing – although it still employs almost three times as many people than finance does.
Matt Hampton, for one, is increasingly convinced that his next job wont be in manufacturing. “Manufacturing is a dying art in Australia,” he says. ”Guys like me should adapt, but a lot of guys can’t because that’s all they know.”
But Ian Carson, who has seen his share of struggling businesses, believes Victoria’s manufacturers can survive, as long as they adapt to the new conditions. ”The ones which are struggling are the ones doing it the same way they have been doing it for many years and haven’t seen the changes coming,” he says.
”You can’t just go along doing what your dad did or what used to work in the past. You have got to be so pro-active. There are people doing very well and they are people who are innovative.”
Carson points to Victoria’s continued strength in professional services firms – engineers, accountants and management consultants. ”Engineering firms based in Victoria and other services are serving not just the mining industry in WA and Queensland but also the world,” he says.
Terry Campbell, too, believes there will be some ”skim-off” to the economy from the mining boom, and believes things will soon start improving. ”We’re probably travelling across the bottom at the moment,” he says.
Indeed, evidence is emerging that the much-promised ”flow through” from the mining boom to non-mining states is taking place. The Reserve Bank argued as much in a bulletin released this week, as it noted that ”the benefits of mining investment and exports flow across the country through spending by mining-related firms and workers on goods and services in other states, dividend payments to shareholders, and the tax and transfer system”.
Victoria has, in its favour, its status as the second-biggest state in economic terms, and what Moody’s describes as its ”sizeable and diversified economic base”. VECCI’s Wojtkiw points to other reasons for optimism – the US economy is improving, and Greece has avoided a default, for now.
But whether all of this will be enough to offset the impact of the high dollar and rebuild consumer confidence remains to be seen.
”There are no easy solutions, but in times like this we need government and key businesses people to take a leading role,” Smorgon says. ”We also need the unions. Maybe things have been too good for too long, because you look at our lack of competitiveness and productivity, and it is obviously a concern.”
The next few months will be crucial, for businesses big and small in retail, manufacturing and tourism, for the Baillieu government – as it argues the case for its surplus-centred strategy – and for the thousands of Victorian workers looking for jobs, and those who may be looking in the near future.
”It’s not a time for humpty dumpties in government, in the business world, in the union and the media,” Smorgon says. ”We don’t want people who fall off the wall when it gets tough. We want strong decisions and I sense an absence of strong leadership as we get into this cycle of despair.”
Adds one senior insolvency industry figure: ”Right now the Victorian economy is in a really delicate position. In retail, we haven’t seen the Armageddon that everyone predicted. But what there is, is a crisis of confidence. Everyone [in Melbourne] is nervous about something, they just don’t know what they’re nervous about.”