Comment

Des Peelo explains the one pertinent question business leaders should ask before making any major decision.Better information means better decisions, which, in turn, means better outcomes. The critical point here is that understanding what the information is, and what it is not, makes for a more informed decision.Concerning major decisions, what is the most dangerous word in the vocabulary of politics, economics, or business? Most people would say ‘risk’, meaning that the result could go wrong, have a poor outcome, and/or have an unexpected adverse effect.Major decisions arise in many circumstances. Directors consider a significant business acquisition or seek to confront a crisis; a politician is pressed on a problematic public issue; an economist is asked to advise on substantial infrastructure spending. All involve risk. The human instinct is to avoid risk or at least minimise it.There is a more dangerous word than ‘risk’, however. That word is ‘assumption’. I have witnessed several difficult circumstances or court hearings where the evidence, written or verbal, involved statements like “I assumed…” or “the assumption was…” In other words, something has gone wrong in using an assumption. As Albert Einstein said: “Assumptions are made, and most assumptions are wrong”.Assumptions are higher up in the decision-making tree than risk. In fact, assumptions create risk. Decisions are made to create an outcome in the future. That purpose, by definition, means making assumptions as to the components necessary to make that decision. An understanding and assessment of risk, therefore, means evaluating the validity of the assumptions.There can be a pyramid of underlying assumptions in a situation. Take, for example, the view that investment in an improved rail network is a ‘given’ good idea (an assumption in itself). Assessing the viability of such an investment necessarily involves assumptions as to passenger volumes, fare prices, capital costs, timescale to completion, availability of finance, and so on. It is instructive to witness the debates about the development of public transport around Dublin, such as an underground rail service and airport link. On differing assumptions, any such capital expenditure can be justified or debunked.Assumptions are not facts, though often presented as such. Indeed, most assumptions are reasonably benign and have a historical comparison or rational basis. But assumptions are made by people and often reflect perceptions, prejudices, and biases. They are seen as valid if they conform to already held views or experiences.Even further back in the assumption analyses are demographics (i.e. the breakdown of the population as to age, location, birth rates, and so on). Almost any significant political or economic decision necessitates knowing and understanding the influence of underlying demographics. The three phases of life – education, work, and retirement – have evolving characteristics and interpretations. Statistics are endless and often challenging to interpret as to trends and reasons why, yet they likely influence significant decisions.Back to the decisions. An insistence on knowing and understanding the key assumptions is the obligation of those tasked with making decisions. For instance, the avoidance of subsequent large cost overruns in capital projects can only be addressed through a prior rigorous assessment of the underlying timescales, cost estimates, comparisons with similar projects and, most critically, a testing of the individuals and/or firms on their capabilities in making the assumptions.The history of major business acquisitions is littered with casualties. The cause is often later identified as being a lack of informed reasoning in making the acquisition in the first place, the underlying assumption being that it must be a good idea because the advisers said so.The pertinent question to ask before a major decision is, therefore: please list in order of importance or risk the top ten specific assumptions in making the project/circumstance work. But remember: vague assumptions (such as a “buoyant economy” or “no change in interest rates”) do not count as specific assumptions.

Annette Hughes discusses the root causes of Ireland’s housing affordability and supply problems, and the possible solutions.Successive governments have had housing and the restoration of a properly functioning housing market as a priority for many years. Despite numerous initiatives, policies, and reports highlighting the persistent problems in the market, EY-DKM’s new report, Putting Affordability at the Heart of the Housing System, has found that the issues are many and complex and there is no single, quick fix.The report, which was prepared for the Irish Home Builders Association (IHBA), highlights the structural defects in the market that have led to rented accommodation costing more per month than a mortgage. Our analysis also shows that there is a significant affordability gap for first-time buyers (FTBs), as their income is insufficient to purchase the median FTB property in 13 mainly urban areas out of 34 areas examined.The report also finds that the deposit required is a significant barrier to homeownership. The average deposit paid by FTBs is 14% of the property price, with many getting support from parents. The cost of the average deposit varied widely, however, as did the time taken for first-time buyers to save it. Saving periods ranged from nearly two years in Kilkenny to more than 15 years in Galway City, Wicklow, Waterford City, Cork City and Dublin City due to differences in income, expenditure, and house prices.36,000 new homes are required each year over the next 21 years to meet housing demand in Ireland but this is unattainable if urgent action is not taken to address affordability issues.A series of measures could reduce the delivery cost of residential development. These include direct financial supports for FTBs, a root and branch reform of the planning system, waiving development levies, accelerating the servicing of zoned lands, actions to address the cost of funding for builders, a full assessment of the impact of new regulations, and the introduction of tax incentives to stimulate development in key locations.The increased tax relief for the ‘Help to Buy’ scheme announced in the July Stimulus should be extended to 2025 and a State-backed shared equity scheme for affordable units on private lands, supported by a Government-funded equity loan of 25-30% of the price, should be introduced.The State takes an estimated 20% of the average delivery cost of a new home. The report, therefore, suggests that consideration should be given to reducing this component for FTBs.A key recommendation is restructuring the planning process to enable, where appropriate, outline planning permission to be obtained early in the process. This would reduce the time frame for delivery, which could, in turn, reduce the cost of financing. The cost and availability of development finance are also covered, with the suggestion that Home Building Finance Ireland (HBFI) should consider accessing EU loans to provide funds at more competitive rates.The quality of new homes in Ireland is much higher than in the past, reflecting new regulations and higher building standards – all of which have a cost. Estimates suggest that these policy-imposed costs account for around 20% of the total delivery cost of a new home. The report recommends that any new regulations under consideration should be carefully evaluated against their impact on the viability of residential construction and subject to a cost-benefit analysis.Under tax considerations, the Government is urged to consider expanding the scope and duration of tax relief available under the Living City Initiative to include newly constructed apartments in designated urban areas to provide a buy-side incentive to encourage their construction.This report is intended to support the Government in achieving the stated objective of putting housing affordability and homeownership at the heart of the housing system. The solutions, while varied, need not be complicated. The early adoption and implementation of even a small number of the recommendations could make an almost immediate difference to many homebuyers and developers, and set Ireland on the road to meeting its housing requirements for the next two decades and beyond.Annette Hughes is Director at EY-DKM Economic Advisory.

Economists may have a plethora of letter-named predictions for the post-pandemic recovery, but Chartered Accountants are depending on a ‘B-shaped’ comeback. Dr Brian Keegan thinks we need to look to Brexit and the US general election for any real answers.Professions are notorious for using jargon, and different professions have preferred styles for their jargon. Doctors tend to abbreviate the ailments they treat, like the “flu”. Accountants tend to prefer acronyms such as IAASA, IFRS and FRC. Economists, on the other hand, use labels, often with reference to the chief protagonist within the economic phenomenon, hence “Laffer curve”, “Keynesianism” and, even at a stretch, “Pope’s children”.Creeping into the commentary at present is an alphabet soup of labels to describe the nature of the post-pandemic recovery. At the outset, we all hoped for a “V-shaped” recovery, denoting a rapid fall-off in activity matched by an equally rapid recovery. Then, more creative economic types, possibly channelling medical concerns over a second surge of the pandemic, started talking about a “W-shaped” recovery. This way, things will start to get better, lapse again and then recover more fully. The latest commentary talks about a “K-shaped” recovery, whereby some sectors of the economy will recover quite quickly, but others will continue to decline. However, judging from our most recent members survey, there is an expectation among Chartered Accountants of what could be termed a “B shaped” recovery, whereby over time most sectors will loop back to their level of activity post-pandemic. Almost all of our respondents thought that business activity would eventually get back to something resembling pre-COVID-19 days. The main area of disagreement was the amount of time this might take, with our members in the Republic of Ireland expecting a quicker recovery than our members in Northern Ireland. The expected difference in recovery time between the north and south of the island is borne out by the ultimate truth serum of economic status, which is the analysis of tax receipts published each month. Counting money will always give a more accurate picture than counting questionnaire responses. Not only that, because of the recurring nature of tax payments, it is possible to trace a coherent and reliable set of comparisons. Tax receipts in Ireland overall have remained remarkably stable, despite the impact of the pandemic. Yet, tax receipts in the UK are showing a serious decline year-on-year. One reason for the difference is down to timing. Ireland counts tax receipts from 1 January; the UK from 6 April by which time, of course, the pandemic was in full surge. However, the differing financial years do not fully explain the disparity. Consumption has fallen in both countries, as evidenced primarily by VAT receipts, but production, as evidenced by income tax and corporation tax receipts, has not shown the same decline in Ireland as in the UK.Resilience in production over consumption could prove to be critical in the coming months since coronavirus is only the first international crisis of 2020. Despite the behaviour of the respective governments, we are all paying too little attention to the impact the end of the UK’s transition period with the EU in December will have on Irish business. There is also insufficient attention being paid to the economic policies of the two main contenders in the US presidential election, nor much being discussed on how the outcome of that election could shape US trade, international corporation tax policy and foreign direct investment because of the focus on the country’s civil discord.The recovery prospects on the island of Ireland will indeed be B-shaped in 2021, but not because of the shape of the economic trajectory. Think instead about the impact of Brexit, and whether or not there is a Biden presidency. Dr Brian Keegan is Director of Advocacy & Voice at Chartered Accountants Ireland.

Barry Dempsey outlines Chartered Accountants Ireland’s new path to real change – for tomorrow, for good.“Real change, enduring change, happens one step at a time” – the words of the inimitable Ruth Bader Ginsburg. You could argue that the change we have seen in the way we all work and live our lives since March has happened far quicker than she could have foreseen. The unprecedented aside, however, her words have real resonance for our Institute as we embark on our own period of real change as an organisation of over 28,500 members.Real change for Chartered Accountants Ireland will be guided over the coming four years by a plan that I am excited and proud to launch, Strategy24. Change is not new to the Institute; when you are more than 130 years old, it tends to become a necessity for survival! It is change by our members and for our members, and as my colleagues who have worked alongside me can attest, engagement with members has been extensive. It has also been frank and honest; we did not want members to pull any punches. Our profession is changing all around us, so we want to be on our toes, working harder than ever to be the Institute that members need. Strategy24 will help us to do this.Our vision and valuesOur vision for Chartered Accountants Ireland is that of a vibrant, modern and highly relevant organisation with a network of digitally connected members who have a strong sense of belonging, no matter what their industry or where in the world they are. While in some ways, COVID-19 has made the world suddenly feel like a much bigger place, it has also accelerated the digitisation of the Institute, giving members that sense of connection even though they are apart. This direction of travel will continue through Strategy24.The values guiding Strategy24 are:Innovation with ambitionCollaboration for impactSpeed and simplicityInclusionTrustThe final value of “For tomorrow, for good” is the hub around which all the other values exist, driving home the “enduring change” that Ruth Bader Ginsburg spoke of, and through which we will create opportunities for members and students as well as ethical, sustainable prosperity for society.Origins of Strategy24Strategy24 builds on the success of our previous strategic document, Strategy 2020, which proved an effective roadmap for us. It identified what set the Chartered Accountancy profession apart and worked to build these differentiators for the benefit of our members.The themes that underpinned Strategy 2020 were attracting the brightest and best to the profession, being relevant to our members, and being the authoritative voice of the profession.Strategy24 will build on these achievements and seek to drive some broader strategic priorities, which represent a more significant change for our Institute, all developed through extensive consultation with members and relevant key stakeholders over the last year. Again, I cannot overstate the importance of this frank and honest engagement. The resulting plan represents all members and is robust enough to guide us – even at this time of heightened uncertainty. Strategy24 is the product of collaboration, trust and new ways of thinking. It is the very manifestation of the values that will guide us towards 2024.The building blocks of Strategy24Connecting: ‘redesigning the member experience’ and ‘amplifying our voice’. We aim to be a member-centric, vibrant and relevant organisation that facilitates a diverse, digitally connected and engaged network with a strong sense of belonging. We must be the effective and leading voice for members – consulted with, and influential on, key issues affecting the profession and the broader economy.Empowering: ‘educating members career-long’ and ‘building trust’. We will design and deliver high-quality, student- and member-centred, future-focused education that develops the capabilities sought by employers, equipping our members and students to excel at all career stages. In everything we do, we will aim to be recognised as an appropriate and effective regulator that drives value for members, stakeholders and the public, ensuring confidence in – and respect for – the Institute and the profession.Evolving: ‘elevating the brand’ and ‘becoming a high-performance organisation’. We will equip members, firms and employers with a contemporary brand that consistently reinforces and epitomises the values of the Chartered Accountant profession. Under this strategy, our Institute will focus on being a financially sustainable, digitally-enabled organisation with an agile culture that supports innovation and collaboration.A strategy for uncertain times When we started work on this strategy over a year ago, it was hard to imagine a threat more real and wide-ranging than Brexit. Indeed, for most of the duration of the development of this plan, COVID-19 did not have a name, having emerged as a ‘novel coronavirus’ on the other side of the world. Contemporary business language like ‘disruption’ has taken on a whole new meaning when, in weeks, entire industries have been decimated and other, never before imagined, niche industries are up and running.From a broader perspective, globalisation and technology have transformed access. Access to markets, knowledge, expertise, learning and capital has expanded exponentially. At the same time, connections and attachments have become lighter and more transient. Where people belong and what they belong to is blurred.Strategy24 is nevertheless a strategy for this uncertain time, and our ambition matches the scale of the challenge. The impact of the global pandemic on our economies and our societies, as well as the shape of our future relationship with our nearest neighbour, are just two of the unknowns that will become more fully known throughout the life of Strategy24. The reference to ‘24’ of course refers to the strategy taking us successfully through to the year 2024, but it deliberately implies more than that. It marks the prioritisation of an always-on, responsive Institute that is attuned to – and motivated by – members’ needs, whether virtually or in person.I hope that members can support, engage with, and see tangible benefits from Strategy24 as we move forward. The collaborative approach does not end with the launch of the document, however. I will continue to encourage your feedback in the weeks and months ahead so that our strategy can achieve what it is intended to, one step at a time. Barry Dempsey is Chief Executive at Chartered Accountants Ireland.

Swift and immense fiscal stimulus has driven equities to all-time highs in some cases, but inflation and interest rates could yet spoil the party.Having entered 2020 at nosebleed valuation levels, equities reacted sharply and suddenly to COVID-19 by falling by over 40% in Ireland, by over 35% in the UK and by just under 35% in the USA. But then stocks bounced right back. By mid-July, the Irish Stock Exchange index was down 16% compared to the beginning of the year, the FT 100 index was down 21% and in the USA, the S&P 500 index was down just 6%. The Nasdaq has even managed to hit new all-time highs.What is going on? The simple answer is that the world is witnessing an unprecedented level of official policy stimulus that is expected to trigger a sharp rebound in economic activity while interest rates (and corporates’ cost of capital) go lower than would otherwise have been expected. This stimulus is being felt first by financial markets but, if the past is an effective guide to the future, it will soon spread to an economy near you.The scale of the pandemic-induced fiscal stimulus announced by government treasuries and finance ministries is vast. According to BCA Research, a Toronto-based investment research boutique, it is more than double the level of stimulus the global economy got in the wake of the global financial crisis over a decade ago. Not only that, but it’s happening much more quickly. There was initially a delayed element of “crisis, what crisis?” to the last big downturn. The reaction this time has been swift and immense.The size of the fiscal response is dwarfed only by the scale of the monetary response. Even in Japan, where the annual rate of money growth has been under 3% for most of the last 30 years, M3 went up at an annualised rate of 10.5% in the three months to May. In the eurozone and the UK, the corresponding figure is about 20%. But the explosion in fresh money creation has been most evident in the USA where, in the three months to May, M3 rose at an annualised rate of almost 90%. The equivalent year-on-year rate of growth was the largest in modern peacetime history.Commenting on recent monetary policy, Tim Congdon and John Petley of the Institute of International Monetary Research concluded that unless the US Federal Reserve decides to withdraw or reduce some of that money injection, “upward pressures on asset prices, and then on prices of factors of production, and goods and services, will be a marked feature of 2021 and 2022.” Ironically, valuation levels may help contribute to yet higher equity values, despite most people believing that equities are currently levitating.A standard long-run measure of an equity’s value is its cyclically adjusted price earnings (CAPE) ratio. This eliminates the cyclical variability of profits as a factor that can distort the standard price earnings (PE) ratio by using average (inflation-adjusted) earnings over the previous ten years rather than earnings from just one year. Doing this compares a share’s price to an underlying ‘through the cycle’ measure of its earnings. The CAPE for the entire US market is nearly 30. It has only ever been this high twice before: in September 1929, just before The Great Crash, and during the 2000 tech bubble.However, it is not enough for us to look at PE ratios in isolation. We need to compare them to the valuation of competing assets. And right now, the value of the equities’ main asset competitor – bonds – are sky-high. Steve Sjuggerud, the author of investment newsletter True Wealth, charts the US 10-year bonds rate minus CAPE. This measure’s current level suggests that equities are relatively cheap! BCA Research has looked at that measure going back to 1955. They reckon it shows that US equities are historically cheap, relative to government bonds!To me, there are two key conclusions to take from this. First, the tsunami of fresh central bank liquidity being pumped into the global economic system means that, over the next 18 months, an equity melt-up (similar to those seen in Japan in 1989 and on the Nasdaq in early 2000) is far more likely than a meltdown. Second, this party will end abruptly if inflation stirs and interest rates start to rise significantly.Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.

Construction has been hit hard by the pandemic, but with the right initiatives and supports it could also play a pivotal role in the country’s eventual recovery, writes Annette Hughes.Ireland entered 2020 in a reasonably strong economic position – preliminary GDP figures for 2019 suggest it was the fastest growing economy in the EU27 over three years, with almost full employment. However, the shock following COVID-19 has been unprecedented.The latest EY economic forecasts (released in May) expect GDP to fall by 11.1% this year. It is envisaged that government borrowing, as opposed to tax increases and public spending cuts, will finance the restart of the economy, predicted to rebound by 6.7% in 2021. Consequently, a benign international lending environment will be crucial, and a budget deficit close to €30 billion – around 10% of GDP – will be required in 2020 (Department of Finance), depending on the evolution of the virus.While the construction sector had been enjoying a consistent, healthy performance at the start of 2020, it was halted abruptly following the onset of the pandemic. All construction and housebuilding sites closed for seven weeks on 28 March, apart from around 35 social housing sites that were deemed essential. Although sites have been re-opening since 18 May, only a slow recovery can be expected. EY-DKM projections based on initial assessments (in May) across housing, non-residential buildings, offices, industrial use and public sector construction show that the volume of construction output by 2022 is forecast at just below 80% of the corresponding volume in 2019. The overall volume of construction output is forecast to decline by 37.7% this year, followed by a rebound of 17.6% in 2021 and 7.6% in 2022.The latest assessment from Euroconstruct has the Irish and UK construction sectors as the poorest performers across 19 countries. The value of construction is estimated to have reached €27.7 billion (8% of GDP) in Ireland in 2019, but the crisis is expected to result in a contraction in construction output by almost 34% in 2020 (5.9% of GDP). In the UK, construction volumes are expected to contract by over one-third. Both Ireland and the UK have the strongest recovery prospects in construction output in 2021 at 17.6% and 22.8% respectively.Meanwhile, the closure of sites is expected to reduce levels of new house building substantially. Notwithstanding supply challenges that existed pre-COVID-19, housebuilding is expected to fall to 14,000 units in 2020, down from 21,138 in 2019 and well below the requirement of 35,000 units per annum.The hope is that the industry recovers more strongly than expected, but there are downside risks, notably uncertainty regarding the virus and fear of a second wave. As such, housing supply constraints could be more significant than they were pre-COVID-19, resulting in an even greater challenge for affordability, the private rented sector, and homelessness.Ireland has the potential to lead the way in a European rebound and there is a substantial commitment of resources for public infrastructure projects by Government in the National Development Plan 2018-2027 and Project Ireland 2040.The new partnership of Government also promised to make “transformative changes” with various actions set out to drive economic recovery and place Ireland as an exemplar in decarbonising our economy. At the time of writing, the immediate actions awaited are the July Stimulus and the distribution of the EU Recovery Fund for Ireland. For construction, it will be essential that funding focuses on capital and labour-intensive projects as well as other essential pre-committed infrastructure projects. As an open economy, Ireland’s recovery is dependent on developments in our major trading partners, notably in the UK. Investing in infrastructure must be ramped up straight away and will deliver substantial economic benefits, as the multiplier spending impacts reverberate through the rest of the economy. But while the Government can transform our country economically, the responsibility for suppressing the virus ultimately rests with the whole of society.Annette Hughes is Director, EY-DKM Economic Advisory.