Where is your growth?by Thomas Charpillet
Last weekend, I booked a trip to Croatia for my summer holidays. With new technologies, everything goes so fast and, especially, it has never been so easy to travel. I used the well-known website: Airbnb. I was able to rent the flat of an individual for a much better price than in a hotel. At the end of the transaction, I paid with my new N26 MasterCard; for those who do not know, N26 is a fintech (combination of finance and technology) which proposes a free demat bank account. It is considered as a new type of bank. In the end, I was quite satisfied: I had organized holidays rapidly and for little money.
I want to discuss the impact of new technologies on the economy and on our consumption habits. The importance of new technologies in the economy keeps increasing. Nowadays, many successful companies base their activities on technology: the GAFA (Google, Amazon, Facebook, and Apple) but also Tesla, Walmart… These companies sharply changed our way to consume: for example, we mostly buy on the internet rather than going to a traditional shopping mall. In France, sales on the internet were about 72 billion of euros in 2016, there were more than 1 billion transactions (33 per seconds). Why that? Because it is quicker and often more affordable than traditional shopping. And, there are also more choices. Here, a good example is Amazon, which completely changed the way we buy goods. As it considered cheaper and quicker, more and more people buy their products on Amazon.
Annual number of worldwide active Amazon customer accounts from 1997 to 2015.
The most shared idea is that new technologies bring growth and fully support the economy as they create job opportunities. With our last example, in 2016 Amazon employed 341.000 people in the world. Furthermore, technologies have lowered costs in many sectors: manufacturing (fewer people are needed to operate a large automatized factory) and services. Telecommunications reduced distances and barriers related to the geographic constraints which tend to boost international relations. Companies became far more efficient in using their resources thanks to technology: for example, Walmart became a world leader in distribution using technologies. It uses computers for inventory, the EDI system, barcode scanning, it has its own satellite system, it analyses sales to be more profitable…
Following that idea, we understand the argument that technology intensity and firm / economic growth are highly and positively correlated. When a company cuts its investment concerning technologies, in the short-term its profit will boost but in the long-run, it will be the contrary: it will make the GDP drop too as investment spending is a large contributor of the GDP growth.
However, we can point out a paradox between economic growth and financial transactions with new technologies. Actually, how can we explain that new technologies do not boost completely the economy? Everybody has in mind that world growth is weak and remains low in any part of the world as we can see with the following graph.
World economic growth between 1961 and 2016
Source: World Bank
We can explain that paradox by the fact that new technologies affect both economy and us. As we see, they boost firms’ activities, but they deeply transform the way we consume and our behaviour. Now, we can buy many products directly on the internet, we can buy with contactless payment, we can share instead of buying… The notion of purchasing and consuming is totally transformed by new technologies. In fact, the economy is becoming more complex. Consumption has always been a strong tool for growth. Since World War II, an important part of the country economy relies on consumption. As products and services change, people keep consuming and keep enhancing growth. However, our new habits do not bring as much growth as they did in the past. There is a friction between our current habits using mostly technologies and the economic system. In other words, the way we consume cannot entirely transform into positive growth actually. Take a simple example, Airbnb: this is great to have the opportunity to rent a house for little money, but we do not give our money to a hotel which employs far more people than Airbnb does. Using Airbnb brings less growth than going to the hotel; the same is true with Blablacar. To understand better that idea, we can apply the formula of GDP.
GDP = C + I + G + (X-M)
Where C stands for Consumption, I for Investment, G for government, X-M exports minus imports.
If people consume less in value, they tend to decrease the GDP.
Furthermore, Airbnb offers more choices that it used to be in a traditional shopping mall, in other words, Airbnb tends to increases competition and so decreases prices. This phenomenon brings less inflation.
These new ways of consuming rely on easier relationships and confidence between users. Economists talk about the sharing economy to name this new consumption. This concept becomes more and more popular and lots of people consume following that concept. We blame the lack of growth in the world and financial regulators do their best to enhance it. But one explanation can be these new ways of consumption. They create less wealth as traditional consumption do. The Deputy Chief Investment Officer at Credit Suisse, Burkhard Varnholt, said that inflation had been killed by Jeff Bezos, the well-known founder of Amazon. For him, inflation is likely to remain low. Why? Because internet and new technologies increased competition in general, which prevents firms to raise prices and so to produce inflation. Moreover, it is likely that we face little inflation in the future because of correct economic growth.
Yes! We are living a revolution, but it is also correct to talk about a behavioural revolution. New technologies have a positive impact on consumers’ life: many things seem to be easier thanks to them. They are bringing comfort and more choices to consumers. But the thing is that these new technologies did not bring as much efficiency as Post-Industrial Revolutions did. With new technologies, the issue is “How can we have a sustainable growth and, at the same time, keep our new consumption habits?”. The answer may be that we are living in a transition between an old economic model and the one of tomorrow. Technologies and their effects are new. We may need time to understand and have in mind that the concept of growth has definitely changed with new technologies, that we might not face high growth again soon.
Percentage of adults in the United States who have used online home-sharing services as of December 2015, by urbanity.