Can the Olympic Flame Heat Up Britain’s Economy?
Business + Economy

Can the Olympic Flame Heat Up Britain’s Economy?


With the opening ceremonies of the Olympic Games just a week away, many in London are already anticipating the thrill of victory, the agony of defeat – and the ecstasy of extra economic activity.

British Prime Minister David Cameron earlier this month said he was confident that the U.K. economy could get a boost of more than £13 billion (about $20 billion) over the next four years as a result of the Olympics. “They should be great for our economy,” Cameron said. “We shouldn’t see them – and this is really vital – we shouldn’t see them as some sort of expensive luxury in tough times. Because in my view it’s precisely because times are tough that we have got to get everything we can out of these Games to support jobs and to support growth in the economy.” Cameron added that he would devote his energy to “making sure that we turn these Games into gold for Britain.”

Analysts are more sanguine – they expect the Olympic flame will help heat up Britain’s economy, but only for a short time. The Games are bound to generate ticket sales as well as business for hotels, restaurants and retailers. They'll also create temporary jobs and tourism. On the other side of the ledger, productivity could take a hit as viewers get wrapped up in the sporting events, and some people will be leaving the U.K. to avoid the Games and the hubbub that comes with them. Some tourists who might have visited London in the coming weeks may similarly have chosen to stay away.

The public cost of running the Games is expected to be at least £11 billion (about $17 billion), but that doesn’t include the price of construction and infrastructure development necessary to be able to host the event. The security costs are also accounted for separately. “The London Games are expected to make a profit (in the sense that revenues will exceed the cost of running the Games) but this will still leave the government with a significant (£8-9bn) bill from construction, security and other costs,” Goldman Sachs economist Kevin Daly wrote in a report released earlier this month. The ultimate tally could run as high as £24 billion ($37.7 billion), according to British media reports – or 10 times the cost predicted in 2005, when London won the bidding for these Games.

What’s the payoff? In the near term, Goldman estimated that the Games would help boost third-quarter GDP by 0.3 or 0.4 percentage points, similar to the 0.3 percentage-point gain projected by IHS Global Insight Chief U.K. and European Economist Howard Archer. “Overall, we expect the impact for the UK economy from the Olympics in the third quarter will be modestly positive,” Archer wrote in a research note Thursday. Both Goldman and IHS Global Insight expect the short-term benefits to dissipate within months, though, with GDP growth falling back in the fourth quarter. “Once the Games are over,” Archer wrote, “the problems facing the U.K. economy will still be there!”

Past Games have had a mixed record in terms of creating lasting financial gains. Cities like Athens, Munich and Montreal have suffered long-term debt burdens because of the costs of planning and hosting the Olympics. Other host cities have used the Games to boost their global stature, draw tourists and attract foreign investment. “For the Beijing and Barcelona Olympics, in particular,” the Goldman Sachs report says, “ex-post studies suggest that hosting the Olympics played an important role in promoting those cities to the world.” London may not see as much upside, the Goldman analysts suggest: “Given that London is already a high-profile city for tourism and investment, the incremental benefit from this promotion may be more limited.”

Revitalizing London’s East End, which the city has used the Games to do, could have a longer-lasting impact, but the size of that benefit isn’t yet clear. The Goldman Sachs report did find evidence from the summer Games held in Los Angeles and Atlanta that the Games can help lift local housing prices, but only slightly. “The effect is small during the first year after the Games, but it increases in the second and third year,” the Goldman report says. On average, the annual appreciation rate rises by about one percentage point – or 2.5 percentage points assuming, as Goldman did, that the effect lasts for two and a half years. Goldman also found that the stock markets of recent Olympic hosts have outperformed a global index in the 12 months after the Games.

The U.K. can certainly use any help it gets. The British economy dipped back into recession at the end of 2011, and the International Monetary Fund on Thursday warned that the country could face “a permanent loss of productive capacity” without changes to current policy. The IMF called for added monetary stimulus through quantitative easing and, possibly, the lowering of the Bank of England’s base interest rate below the current 0.5 percent. Earlier this month, the British central bank authorized an additional £50 billion worth of asset purchases.

Still, if the Olympics don’t produce lasting economic benefits for London and the U.K., the host country might at least find some tiny measure of consolation from the results of the competition. According to the Goldman Sachs report, over the past 10 Olympics the host nation has won 54 percent more medals than it took in Games held elsewhere.