Is the penny worth it?

In the UK, there are 11.3 billion 1p coins in circulation, together worth £113 million. This accounts for nearly 40% of all coins in the system. In the US, an estimated 150 billion 1 cent coins are being circulated, that if stacked on top of one another, would stretch 60% of the distance to the moon. 

In Canada however, the production of the one-cent coin was stopped earlier this year as it was determined by the government that the costs of its production were not worthwhile. According to the Royal Canadian Mint, the producers of the coin, each one-cent coin was costing 1.6 cents to produce. This meant every penny minted represented a loss for tax payers and resulted in a net loss of C$11m (£6.9m) a year for the Canadian government. This, as well as the hoarding of pennies and handling costs placed on retailers were enough to convince Canada that pennies just aren't worth it. Since February, change in retail has been rounded up or down to the nearest five cents. 

Canada are not the first country to have done this and are following in the footsteps of countries including Australia, Sweden, Brazil and New Zealand (who's also scrapped two and five cent coins). There are also many sceptics of the one cent coin in the US (which costs 2.4 cents to produce), and in Russia the central bank is pushing for the 1 kopek piece to be removed. 

In the UK, for many people the British penny seems like a beloved piece of history, as our older generation reminisce on childhood trips to the sweet shop to spend their pennies and half pennies. Half pennies were scrapped in the UK in 1984 to account for inflation. With the majority of transactions in sweet shops now priced by weight, and single items costing 2-3p, is it only a matter of time before pennies disappear too? 

The reality is that the purchasing power of pennies has been eroding rapidly and they are now nearing worthlessness. A 1p coin is now worth less than one-twelfth of its original value in 1971. Spending 1p in 1971 would be the same as spending 12p today. It seems the penny's existence is running a losing race against inflation.

It's not just the depreciating value that's turning people against the penny, for many people, pennies are simply irritating, weighing down their pockets and cluttering their purses. Research suggests that one-quarter of Britons would happily get rid of copper coins, while a similar proportion admit to hoarding them in jars and various scatterings around the house. Another poll found that up to one in five British adults aged 18-24 throw small 1ps and 2ps in the bin because they think it’s a nuisance. Consumers aren't alone in considering the pennies literal value to be less than their handling value, as many retailers feel the time and money spent handling and counting small change just isn't worth it.  

Despite this, unlike other countries, the cost of production of the penny in the UK is less than its face value, at under 0.3p to produce each penny. This is as a result as the penny being changed to be produced from steel, with a copper plating rather than purely from copper. This differs from the US, where one cent is produced from zinc, a more expensive metal. In the UK, the existence of the penny therefore doesn't seem to be damaging the economy, but it's disappearance could have some negative effects. Arguably the largest argument against the scrapping of the penny is the millions of pounds raised by charity through the collection of pennies and small change. Moreover, for those who do hoard pennies at home, when they are eventually cashed in a large enough stash of near worthless pennies will accumulate to a total that is certainly worthwhile. If the penny was scrapped, the cost of a good that was previously £9.99 would inevitably be rounded up to £10. Firms, in retail in particular, would face the "menu costs" associated with changing information on price tags and online. 

It therefore seems that as things stand, the removal of the penny from circulation is not worthwhile, despite the actual value of the penny growing exceedingly closer to worthlessness. The removal of the single cent in the US, however, seems much more feasible as a result of its higher production costs. Some people argue that we are more likely to see the end of coinage in general than the end of the penny alone as digital transactions are becoming increasingly popular. Currently, tangible money is still popular enough with the majority of transactions below £10 using cash. The increasing use of digital transactions, whether it be online or via credit or debit cards seems more likely to be the bigger threat of the UK's current spending normalities.

The Lipstick Effect

When studying A level Economics, you learn the difference between a luxury good and an inferior good. A luxury (normal) good is a good for which an increase in income leads to an increase in demand. The good is not necessary for living, but is deemed as highly desired within a society. An inferior good is a good for which an increase in income levels leads to fall in demand.

The lipstick effect is the theory that during periods of recession or economic downturn, consumers will be more willing to buy less costly luxury goods over more expensive luxury goods. For example, rather than splashing out on a new fur coat, women are more likely to seek material solace in small indulgences such as lipstick. L'Oréal saw its UK sales grow 5.3% in 2008, the heart of the most recent recession. People still buy luxury goods during economic hardships, but they are more likely to choose goods that will have less of an impact on their discretionary incomes. 

It explains why it is often the case that restaurants and entertainment industries do well during a recession. Consumers that want to treat themselves during a time of financial difficulty settle for a relatively cheap night out, for example through a cinema trip or meal out, over a more expensive experience such as a holiday.

In May of this year, "China Daily" reported that the lipstick effect had hit China as the Chinese economy began to slow. China's GDP rose 7.8% in 2012, the first time that the country's growth rate was below 8% since 1999.As the industrial and manufacturing sectors declined last year, fashion brands soared. The retail value of the beauty and personal care sector grew from 184.1 billion yuan in 2011 to 202.1 billion yuan in 2012. Again, L'Oréal saw its market share grow from 10.8% in 2011 to 11.2% in 2012. 

Is UK Economy on the Road to Recovery?

The past week has seemed to have brought with it vastly optimistic news for the UK regarding progress within the economy. This suggests that the country is finally recovering from a prolonged slump in the economic cycle, after being faced with a double-dip recession.

A macroeconomic objective that is currently being met within the UK is price stability. The UK is currently within it's target of a 2% rate of inflation, plus or minus 1%. Households can celebrate a fall of inflation, from 2.7% in September to 2.2% in October. This is a measure of the consumer price index (CPI- a measure of changes in price of a representative basket of consumer goods and services).

It was forecast for the inflation rate to be at 2.5%, but fell below this. The largest spur in this decline in the rate of inflation was the fall of transport costs by 1.5% between September and October, which occurred as a result of falling fuel prices. There has also been a fall in the rate of inflation in both education and food costs. However, the relief felt by households is likely to be short lived, as price rises by energy firms have yet to take affect on inflation rates.

Another key economic indicator is the level of unemployment.The unemployment rate of the UK has fallen by 0.2% to 7.6%, the lowest rate in over three years. This brings the rate closer to the 7%, which is the level at which the Bank of England has said it will not consider raising interest rates from 0.5% until the employment rate falls below this 7%. Reaching this rate does not guarantee an automatic change of interest rates. As interest rates are used to control inflation, there is currently no obvious pressure for an interest rate rise.

The governor of the Bank of England, Mark Carney says that the UK recovery has "taken hold" and that unemployment will fall sooner than it had forecast. Annual economic growth is expected to be 2.8%, rather than the 2.5% that was predicted in August. Could it be that after the high levels of economic hardship that have been felt in the UK since the financial crisis of 2008, that finally the country has pulled itself together and is on the road to recovery? It is progress over the next few months that is likely to determine whether or not things are being to look up for firms and households of the UK. 

Will Greece Ever Recover?

There is no exact answer to the direct cause of the EU crisis as many different factors have had an effect. Debts throughout European countries have been growing over the last decade as interest rates remained low and spending increased. Greece however, are a different story. Joining the EU required countries to keep “sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP”. Countries such as Italy, Germany and France were of the first to break the 3% rule. Spain, although now seen as a major concern within the Euro, remained within the guidelines issued up until 2007.

Greece in this case did not ever meet the criteria of the Maastricht Treaty and in fact falsified their data (Statistics of their budget deficit were changed to meet the demand of the fiscal policy) in order to receive entry into the Euro. Once a member, they continued to manipulate their data until it was revealed in late 2009, government debt had reached 300bn euros (129% of GDP). In 2002 the euro replaced all existing currencies of the countries who had joined. Being part of the euro made it easier for them to borrow money and had allowed them to go on a debt-funded spending spree, despite already misrepresenting their current account balance. High-profile projects such as the 2004 Athens Olympics went well over budget, causing public debt and deficits worse than ever before.

Things have gone from bad to worse. Greece’s GDP growth is nonexistent. Hardship has become a serious problem with reports that a fifth of their nation are living below the poverty line. Corruption within their economy has also become endemic. Tax avoidance and evasion is more common and public spending -with an increase in civil servants despite their- grew out of control. Between 2002 and 2008 private debt rose by nearly 100%. Joining the Euro gave them the access to cheap money with very little interest. The increase in their wages fuelled a strong consumer-led growth over the seven year period as the graph shows wages nearly increased by three times the amount they were at in 2000. Because of this, the people of Greece used their savings to purchase normal goods which in hindsight is seen as an impetuous decision.  "A couple of years ago, there were more Porsche Cayennes circulating in Greece than individuals who declared and paid taxes on an annual income of more than 50,000 euros, a figure only slightly above the vehicle's list price". 

The European Crisis is an ongoing debate with many different political, economic and social points of view. Skeptics argue that leaving the Euro would be Greeces best solution while many suggest remaining part of the currency is their only chance of recovering from such states of depression. Would following guidelines similar to Latvia’s severe austerity programme help Greece recover from the state they find themselves in now, or are things too late?

Behavioural Economics (and digital marketing)

In my previous post, titled "Auditing firms are branching out", I mentioned investment that is taking place into digital marketing firms. Today I am exploring the application of digital marketing to a relatively new field of economic theory- behavioural economics.

Behavioural economics is a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making. A standard economic theory assumes that consumers make rational, informed decisions that reflect their own self-interest. Assuming this, market forces will result in the best producers (in terms of service and quality) to be the most successful. Behavioural economics does not make this assumption. Instead, the theory aims to develop models that account for the irrationality that occurs within economic decision making. This includes varying habits, instincts and interpretations, as well as the subjectivity of decisions to psychological biases. Behavioural economics is used in an attempt to better understand decisions made and biases exhibited by consumers.

Four concepts of behavioural economics can be particularly applied to digital marketing:

1. The Mere-Exposure Effect: this a mental bias where people tend to develop a preference to things merely because they are familiar with them. This is seen in ecommerce, where familiarity in the store layout and the online purchasing process means people tend to prefer to use online stores that they've used before. The mere-exposure effect can be exploited in ecommerce by encouraging customers to return through email marketing and social media.

2.Habituation and Defaults: Consumers generally prefer to sticking to processes they know over adopting new ones. For example, it is a greater cognitive effort to learn how to use and purchase from an unfamiliar website. Because of this, simple navigation and processes are necessary to limit cognitive obstacles to new customers. It is also useful to prevent any sense of risk with purchasing online, which is often done through safe checkouts and the use of well-known payments methods such as PayPal, used on a vast amount of ecommerce websites.

3. Customer Loyalty: If a consumer has had a positive experience purchasing through a particular online website, they are more likely to purchase from the website again. Special deals, and loyalty rewards are often used in ecommerce in order to develop long-term relationships with consumers.

4. Social Proof and Contagion: It is common for people to follow the trends of behaviours and actions shown by others. Consumers will gain more trust in websites with higher customer reviews and satisfaction by previous customers. This can convince new customers to a business is trustworthy, and may sway their purchasing decisions from a firm with worse or less reviews.

Latvia's Story

After becoming independent from the Soviet Union in 1991, Latvia joined the European Union in 2004. Their economy in the middle of 2007 was of the fastest growing in Europe with GDP growing by 10%. After the crisis struck in 2008, Latvia took one of the greatest economic downfalls in world. The last quarter figures of GDP in 2008 showed a contraction of 10.5% in comparison to the figures from 2006. Through both 2008 and 2009 Latvia was regarded as one of the worst countries in Europe economically. 

Unemployment rose to 19.7% in 2009 and economic output fell by almost a quarter. The real-estate (consisting of buying, selling, or renting land, buildings or housing) bubble burst was one of the main causes of the Latvian economic crisis. Prices plummeted by up to a half in certain areas of the country.  

Since the crash and economic collapse Latvia have received bailout, an act of giving financial assistance to a failing business or economy to save it from collapse. For the first year of recovery, Greece -who will be discussed in tomorrow's blog- in fact were in a better state than Latvia. Austerity measures were introduced, the Latvian protests against it were never sizable in numbers. Even the national radical forces themselves couldn’t stage big enough protests. There was only one anti-governmental riot which took place on 13th January 2009. However, Latvia’s short term loss has lead to a long term benefit and what IMF quote as an “Incredibly impressive achievements”. They are now considered as one of the fastest growing economies with one of the highest GDP growth rates out all of European countries. 

After completing all Maastricht objectives in order to join the Euro they are set to become the 18th member on 1st January 2014 by giving up their currency, the Lat. Although Latvia have achieved such a success with their tough austerity measures, is joining the Euro really going to be an advantage to them? They already have the benefits of a single market through being part of EU so with what's happening in the Euro at this current time would it not be best to stick with the Lat? Only time shall tell. 

Auditing firms are branching out

As the big four auditing firms in the UK continue to grow, Deloitte and KPMG have begun expansion into technology, social media and data provision.

Deloitte founded a independent division of the firm- Deloitte Digital in 2012. After its acquisition of Ubermind Inc. (an innovative mobile agency) last year, Deloitte Digital is now buying the social media firm Banyan Branch who provides digital marketing solutions through services such as social analytics and insights, and community management. This acquisition is a part of Deloitte's strategy to add "a full suite of digital marketing services" to its current business and technology services.

KPMG is now also diversifying into data and analytics. Today, the firms first investment fund (of $100 million) was launched. The fund, formed by KPMG capital will invest primarily in firms through strategic acquisitions and technology partnerships. Investment is set to take place in multiple areas of business, such as enhancing business flexibility, regulation and compliance, improving workforce productivity and customer and revenue growth. It will also sponsor other news firms in growth sectors including energy and telecommunications.

As the diversity of these firms are widened, could it only be a matter of time before other large firms, such as the remaining members of the big four, PwC and Ernest & Young, follow Deloitte and KPMG into a new era of substantial social media and data provision investment?

The future doesn't look so bright for Twitter. #sad

A couple of days ago Twitter released its shares on the NYSE. Initially their prices rocketed to way above what had been expected, with shares climbing to a pinnacle of $50.09 during the first day of trading. From the rapid increase in value on the first day of the stock market (79% of IPO), shares dropped by 7.24% during the second to a value of $41.69.  It will be interesting to see what happens today and throughout the rest of the week as to whether prices continue to decrease. 

Since the creation of Twitter in 2006, the micro-blogging platform has yet to make profit. Twitter posted they had made a loss of $134 million in the first 9 months of this year, in comparison to Facebook which had profits of over $1 billion before taking to the NASDAQ stock market. 

Twitters future isn't looking as bright as some may expect. The strict constraint of the 140 character limit and the fact it is used as a means of promotion, whether that be through self-advertisement or unattractive promotional links has put users off, like myself. For exhibitionists it is a perfect way to reflect their lives and address the public but realistically, it is nothing more than a marketing platform. Facebook still prioritizes over links with close friends and the increasing number of mobile phone apps, such as WhatsApp and the newly introduced BBM messenger (now available on the App Store?) has given Twitter the backseat. 

The total monthly active users on Twitter sums to 20% of Facebook's.  The company also claim that more than 75% of their activity is users accessing their accounts through mobile phones. Despite the popularity, Facebook still receives over four times the amount through mobile use compared to Twitter.  The most followed celebrity, Katy Perry is also no match for the 80 million likes Rihanna has received on Facebook.  

Considering all this, it will be hard for Twitter to begin making money. I suspect, if they are to start making a profit it won't be for another few years. Its best chance to help boost growth is by using the $2 billion available to them and make some strategic acquisitions, preferably through companies that already know how to make money.