Do we still have a need for cash? Photo / Lynda Feringa
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, target="_blank">click here.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
“I always follow your columns... your comments at the very end of one of your recent articles regarding ‘deflation’ tweaked my interest. What connection is there to AI and an ageing NZ population and deflation?” - Ron Melville
I’ve always tended to take an optimistic view of the future. Perhaps this is an example of that.
But essentially what I’ve alluded to in my previous columns is the argument that big trends in demographics and technology will put a lot of structural deflationary pressure on pricing.
“Inflation is always and everywhere a monetary phenomenon,” economist Milton Friedman famously said.
He’s not wrong and I’m not arguing that big spending by the Government and loose monetary policy will ever stop causing inflation.
But, to put it bluntly, older people save more money and spend less than younger people. So as the population mix skews older, that trend becomes a natural restriction on the money supply in an economy.
There’s no doubt the world’s population is ageing. The Financial Times reports on a study by the Institute for Health Metrics and Evaluation which looked at 304 countries and territories. It found that 76 per cent will dip below population replacement rates by 2050 - a number that will rise to 97 per cent by 2100.
Generally, there is a correlation between women’s education and lower birth rates. Declines are also most pronounced in wealthier nations.
In 2023, New Zealand experienced its lowest natural increase in population since World War II with 19,071 more births than deaths - in 1943, there were just 17,562 more births than deaths.
Sociologist Paul Spoonley has made the point that by the end of this decade, almost a quarter of all people in New Zealand will be aged over 65.
Economists are divided on the impact of our ageing population. Some argue that older populations will mean fewer workers, causing labour shortages and putting inflationary upward price pressure on wages.
I don’t buy it. Places like New Zealand - and most other OECD nations - will continue to have access to a global pool of migrant labour to fill shortfalls.
And even in countries that don’t like immigration - ie Japan - the ageing population has clearly had a deflationary impact.
Population Ageing and Inflation, a 2019 study by the University of Warsaw’s Paulina Broniatowska published in the Journal of Population Ageing, looked at 32 OECD member economies over the period from 1971 to 2015. It concluded that a “larger old-age dependency ratio is indeed correlated with lower inflation. Therefore, ongoing population ageing may exert downward pressure on inflation”.
It makes sense. In the decade before the pandemic, the world battled deflation as a serious economic concern. When we all went into lockdown, central banks kept economies functioning by loosening the money supply. It worked but also came with excessive inflation - a reminder that Friedman’s fundamental rule still holds.
When the monetary supply balance is restored - which we expect it to be by the end of this year - there is every reason to expect that central banks will again be fighting big structural deflationary forces.
Ironically, even after all this post-pandemic global inflation, Japan has only now lifted its official cash rate out of negative territory. Last month the Bank of Japan raised interest rates for the first time since 2007, becoming the world’s last central bank to end negative rates as the country puts decades of deflation behind it.
The Financial Times described it as “the end to one of the most contentious economic experiments of recent times”. My pick is that this isn’t the last the world has seen of negative interest rates.
What about the robot workers?
I’m hopeful Artificial Intelligence (AI) won’t create mass unemployment. From the steam engine to the computer, fears about machines replacing humans have generally been unfounded. There has been disruption and periods of upheaval with some jobs becoming obsolete. We might feel that in the next few years.
But on balance, more jobs are created and here we are in this high-tech age with some of the lowest unemployment figures in modern history.
AI might represent a big step change but we might well need that as the labour market grapples with the retirement of the Baby Boom generation.
Meanwhile, once we get over the novelty value of using AI to mimic human creativity, there are a lot of boring back-end jobs it can do to make the world more efficient, boost productivity and bring down costs.
In February I was wowed by Spark NZ’s AI open day - which didn’t feature robot dogs or talking video avatars. There were simple practical AI applications like smart cameras that could be mounted to cars to inspect roads for potholes. A road assessment that took 66 days to complete now takes just seven days. Road assessors can cover 300km a day, compared to the 15km a day achievable using the traditional approach. The AI analysis also improved the macro-data, which can build a more accurate picture of which regions need the most attention. That might mean more engineers available to actually fix the roads and build new ones.
We humans might have a bit of life in us yet, but last month was a bad one for the demise of some iconic Kiwi brands and signs of demise for two fundamental social institutions.
Two of my favourite childhood treats, Toffee Milks and Honey Puffs, have been discontinued.
As a child in the 1970s and ′80s, the tiny chocolate-coated toffee bars were the best value for money candy at the dairy (narrowly pipping the K-Bar). I can recall them costing as little as 6c; older readers may have paid even less.
Honey Puffs were a rare treat in Kiwi houses where Weet-Bix was the staple. I think we only ever had them on birthdays and when we went camping (because they were so delicious they didn’t need much milk).
Neither announcement appears to have been met with protests in the street or petitions. I’d start one, but it’s not like I’ve purchased either in years and we can’t expect companies to keep brands alive to indulge our nostalgic memories.
NZ Post’s plans to end the daily march of the humble postie was more of a shock. Physical letters are now so rare that NZ Post plans to fold delivery into its courier service.
“The way we deliver mail in the future will look very different and we know our future workforce won’t be the same size and shape as it is today,” NZ Post chief executive David Walsh said.
“This decision means that there will be significant job losses in existing mail delivery, processing and support roles.”
Cash-free world
Meanwhile, an even bigger social and economic change looms with the demise of cash. Last week it was announced that (after a change of ownership structure) security firms Armourguard Security and ACM have merged their respective Cash-In-Transit (CIT) operations.
“Cash usage in New Zealand has been in steady decline over the past two decades, which accelerated due to the impacts of the Covid-19 pandemic,” owner Evergreen said in its press statement.
“This decline in cash usage has led to significant excess capacity within the New Zealand cash logistics services infrastructure. Armourguard Security and ACM have each struggled to support the rising costs of servicing the New Zealand cash economy.”
It gets harder and harder to get cash, with banks providing fewer ATMs. Now some retail businesses are refusing to handle it.
We can live without Honey Puffs and Toffee Milks, but what about cash? Is the end nigh? What do we still need it for?
Let me know what you think.
What even is money?
Reserve Bank Governor Adrian Orr went viral online in February for a comment he made publicly about printing money at a Finance and Expenditure Select Committee hearing: “It’s a great business to be in, central banking, print money and people believe it”.
At the time, he was having a dig at cryptocurrencies. And that didn’t go down well in crypto-chat rooms.
Last week, talking to the Herald’s Madison Reidy for Markets with Madison, he clarified the comments. “I said people believe it because it is a fiat currency, it is backed by current and all future taxpayers of New Zealand with a Crown balance sheet.
“We print a number on a piece of plastic which is an I-owe-you that people trust because of what’s behind it.”
Orr and the Reserve Bank deliver their April Monetary Policy Review on Wednesday - don’t expect much change from February’s full statement.
Watch the full Orr interview here:
Dollar dives
March was a rough month for the Kiwi against the Greenback, which won’t help Orr in the inflation fight. A lower value dollar means more expensive imports - and more money in local currency for exporters.
BNZ senior markets strategist Jason Wong described the Kiwi as underperforming and oversold in his latest note. Commodity prices went New Zealand’s way in March, usually a reason for a buoyant dollar. Perhaps it was recession news. Despite feeling it might be due to come back a bit short-term, Wong noted that BNZ remains bearish on the Kiwi for the rest of the year - mostly based on New Zealand’s poor economic performance relative to Australia.
Does calling it a recession make it worse?
Maybe. Consumer and business surveys released by ANZ last week showed confidence falling sharply in the wake of news the country had entered recession.
But for once, that might not be such a bad thing. On Sunday I looked at how much perception drives reality when it comes to economic conditions, and what that might mean in a cycle where getting rid of inflation remains the primary goal.
Is New Zealand’s biggest dairy export market becoming self-sufficient?
China is on track to become the world’s third largest milk-producing country, something that could potentially cause problems for local exporters, writes Andrea Fox in a feature-length read for the Business Herald.
Chinese net total dairy product import volumes fell 15.7 per cent year on year in 2023, with imports of whole milk powder - a major New Zealand export product - down 39 per cent, according to Rabobank.
Meanwhile, between 2019 and 2022, China’s milk production has had a compound annual growth rate of 7.1 per cent.
Fox talks to key industry players about how much of a concern this could become for our economy.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz... or leave a message in the comments section.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist. He also presents and produces videos and podcasts and is the author of the best-selling book BBQ Economics. He joined the Herald in 2003.
Economic recovery is coming but won't solve structural problems.