By Bernard Hickey
Something has changed in New Zealand's economic chemistry that is forcing our policymakers and business owners to revisit many of their old assumptions about how we earn and spend.
It's only now as the economy starts to recover after 6 long years of recession or near recession that this change in chemistry is revealing itself. No one is quite sure yet why it's changed, but it's clear something has and it has profound implications for business owners, voters and politicians alike.
The Global Financial Crisis was by most measures our biggest economic shock since the 1930s, but most economists believe it is now over and patterns of spending, employment and consumer should be returning to 'normal'.
The trouble is they're not and it's now long enough to start seriously questioning the assumptions underpinning how our government collects revenue and spends it, how we train and employ people, and how to make and sell products and services.
The first place to see this change is on our roads and who's driving on them. The Ministry of Transport has noticed in the last six months that people are driving less than they 'normally' would at this stage in an economic recovery. They're still driving to work, but they're choosing to drive less on holidays or other 'discretionary' outings than they should if the pre-GFC patterns were followed.
Collections from fuel excise duties and Road User Charges are running about NZ$90 million below forecasts for the current 2013/14 year. MOT isn't exactly sure why we're doing less discretionary travel, but there's a few factors at play.
The ageing population and lower birth rates could be reducing driving, given people over 40 and particularly those without children go on fewer outings. MOT is also finding youngsters are getting their driver's licenses later, or not at all. It seems the young are more interested in burning through their data caps on their iPads than doing burnouts in their cars. Also, the average age of New Zealand's car fleet has increased by more than a year to 13.4 years in the last decade and older cars tend to be driven less. All this has added up to a 7% fall in average kilometres driven per capita since 2005.
Also, the relationship between petrol prices and car usage may be more 'elastic' than before the GFC. Previously a spike in the petrol price would cause a short term dip in travel, before usage returned to normal. Now cash-strapped drivers seem more sensitive to petrol prices, which have almost doubled in nominal terms in the last decade.
And consumers are not just more sensitive about petrol prices. Electricity demand has also flattened out for the first time in more than a century of economic growth after a doubling of prices over the last decade. Household power consumption has fallen 3% in the last four years.
This week's retail sales figures highlight the changes happening in the 'chemistry' of the economy. Total spending volumes are recovering and the strength surprised a few economists, but it's happening in unexpected areas such as accommodation, alcohol, takeaway foods, electronics, telecommunications and cars. Spending is accelerating most for products and services where prices have fallen, which seems natural.
That means anything imported that benefits from the high New Zealand dollar or where there is genuine competition pressing down on prices is proving popular. Locally produced products or services where prices have inflated rapidly over the last decade because of tax increases, which includes fuel and electricity, are taking a hammering.
One reason consumers are so sensitive to price and are shifting towards cheaper services in particular is that wage growth has also shifted lower. Last week's jobs and wages figures showed average wage inflation falling to its lowest level in at least a decade. Jobs are returning, but they seem to be in the lower wage and less secure services sectors such as fast food and aged care. The young are being hit hardest by these 'McJobs' and by unemployment rates in their high teens, near the worst levels since the early 1990s.
A pattern is emerging. An ageing population with weak wage growth and high youth unemployment is opting to drive less and buy relatively cheaper goods and services, particularly if they are imported and benefit from a strong New Zealand dollar. Previously 'inelastic' demand for the likes of fuel and power appears to be more 'elastic', which means price changes have a much bigger impact than they used to. A structural type of deflation is seeping into the bones of the economy.
Businesses and governments doing their tax and revenue forecasts should think more about deflation and the hyper-sensitivity of consumers to price hikes. It also means low interest rates for longer.
This article was first published in the Herald on Sunday. It is used here with permission.