Bernard Hickey: Kiwis keep the belt tightened

The average age of our car fleet is ageing and older cars are driven less. Photo / BOPT

Something has changed in New Zealand's economic chemistry, and it is forcing policy-makers and business owners to revisit many assumptions about how we earn and spend.

It's only now, as the economy starts to recover after six long years of recession, or near recession, that this change is revealing itself.

Economists believe the global financial crisis is now over and patterns of spending, employment and consumption should be returning to normal.

But they're not and it's time 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. The Ministry of Transport has noticed in the past six months that people are driving less than they "normally" would at this stage in an economic recovery.

Collections from fuel excise duties and road user charges are about $90 million below forecasts for the current financial year.

The ageing population and lower birth rates could be reducing driving, as people over 40 and particularly those without children go on fewer outings. The ministry is also finding youngsters are getting their driver's licences later, if at all.

The average age of our car fleet has risen by more than a year to 13.4 years in the past decade and older cars tend to be driven less. All this has added up to a 7 per cent fall in average kilometres driven per capita since 2005.

The relationship between petrol prices and car use has also changed. Previously a spike in the petrol price would cause a short-term dip in travel, before it returned to normal. Now cash-strapped drivers seem more sensitive to rising petrol prices.

Electricity demand has also flattened after prices doubled over the past 10 years. Household power consumption has fallen 3 per cent in the past four years.

This week's retail sales figures highlight the changes happening in the "chemistry" of the economy. Total spending is recovering, but it's happening in unexpected areas such as accommodation, alcohol, takeaway foods, electronics, telecommunications and cars. Spending is accelerating most on products and services where prices have fallen.

That means anything imported that benefits from the high New Zealand dollar or where competition is pressing down on prices is proving popular. Locally produced products or services for which prices have inflated rapidly because of tax increases, which includes fuel and electricity, are taking a hammering.

One reason consumers are so sensitive to prices is that wage growth has also slowed. Jobs are returning, but they seem to be in the lower-wage and less-secure services sectors such as fast food and aged care.

A pattern is emerging. An ageing population experiencing weak wage growth and high youth unemployment is opting to drive less and buy cheaper goods and services. Previously "inelastic" demand for the likes of fuel and power appears to be more "elastic", which means price changes have a much bigger effect than they once did. A structural type of deflation is seeping into the economy.

Businesses and governments doing their tax and revenue forecasts should think more about deflation and the hyper-sensitivity of consumers to price rises. It also means low interest rates for longer.