Low interest rates are motivating Victorians to spend more and invest in property but it's uncertain how long the good times will last.
Victoria's economy grew an estimated 2.2 per cent in 2014-15, up from the 1.7 per cent growth recorded for the state in the previous year, according to a St George Bank economic outlook.
A weaker Australian dollar and low interest rates have resulted in an uptick in Victoria's employment and spending indicators.
"Strong population growth and the buoyant housing market are also propping up economic activity," the report says.
But there are a few challenges on the horizon.
It's unclear how much longer Victoria can sustain its high levels of residential building activity, which has been high for some time, the bank's senior economists say.
In July, dwelling prices in Victoria rose 11.5 per cent on the year, the strongest annual growth in 11 months, pipping the average for Australia capital cities of 11.1 per cent.
Economists predict the demise of car manufacturing and closure of plants in Victoria over the next two years will affect building activity and employment, but consumer spending is expected to continue growing off the back of record-low interest rates.
In the year to the March quarter, 8.8 per cent of consumer spending was on household furnishings and equipment, reflecting the increased activity in the housing market.
Retail spending reached 5.3 per cent in June, the strongest rate in seven months, while recreation and culture recorded solid growth at 6.8 per cent.
St George economists believe improving consumer sentiment is an encouraging sign that household spending will continue to grow at a moderate pace.
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