Will the Olympics see the UK economy go for gold?

30th July 2012

The modern Olympic Games date back over a hundred years, and while they are a celebration of the world's finest sporting talent, history shows they can also make a big impact on a country's economy.

So is the Olympic host city the real winner?

History demonstrates that the large cost of staging the Olympics has been worth it in some cases when it comes to the country's economy. For example, South Korea's economy grew 12% in the year of the 1988 Seoul Olympics, but the most successful Olympics of modern times were the Barcelona Games in 1992, which marked the start of an economic and cultural renaissance for the Catalan Capital.

But there are some Olympic venues that have turned into white elephants despite all the talk about their regenerative potential. Athens, Sydney, and Barcelona invested heavily in creating landmarks for their cities, but the first two stadiums are used infrequently, while Barcelona's venue is not used to capacity.

The Montreal Games in 1976 were a financial disaster. Costs spiralled to four times their original estimate, and it only finished paying back the debt three years ago after heavy borrowing.

And the projected profit from hosting the games can fall far short of reality. Sydney hosted the games in 2000, and a number of studies during the 1990s estimated that the Sydney Olympics would bring substantial increases in Australian consumption, with a top estimate of $5.6 billion, says blog the Conversation.

"Did the estimates made before the Games turn out to be realistic? Many factors influenced what happened to the Australian economy besides the Olympics, so we used an economic model developed by our Centre to isolate the economic effects of hosting the Games.

"We simulated the behaviour of industries, households and government resulting from hosting the Games for each of eight Australian regions over the years from 1997 to 2005. Our results revealed that rather than producing an economic benefit the Sydney Games actually reduced Australian household consumption by $2.1 billion."

But what about London?

This remains to be seen. However, there are some figures around which might give us a steer.

According to Insead Knowledge, the 2012 games cost £9 billion. So what will be the return on this staggering amount of money once the cheering stops?

"Last time Britain hosted an Olympic Games was 1948 when the organisers had a post-war austerity budget of just £750,000 which generated a modest profit of £30,000." There is a similarly gloomy economic backdrop this time round, but whether they'll be a positive return is as yet unknown.

"The disparity in spending between the two London Games is striking – 0.01 percent of GDP in 1948 compared with 0.7 percent in 2012," says this article. "If you take an additional £2 billion of government spending on enhanced security into account, London 2012 will cost the equivalent of Britain's total GDP in 1948."

Prime Minister David Cameron has predicted the games would provide a £13 billion boost for "U.K. plc", but has been vague on the details.

Some have tried to make their own predictions. For example, Visa predicts that both the both the Games and the Paralympics will generate £804 million in consumer spending this summer, which, with the multiplier effect, could be worth as much as £1.2 billion in spending.

From 2013 to 2015 Visa is predicting an ongoing economic boost worth £4.12 billion – some way short of recouping the £9 billion investment.

Goldman Sachs predicts a short term boost to the economy of 0.3 percent to 0.4 percent in Q3 – enough to perhaps temporarily lift the U.K. out of recession.

With an increasingly gloomy outlook for the UK economy, it is difficult to see a dramatic boost from the Olympics. So who will be the true winner? There are the corporate sponsors, and a 2012 Games report from ratings agency Moody's predicts that the Gold medal winner will be this group.

And according to Goldman Sachs, the host nation has won 54% more medals on average than it typically does – so that'll give our morale a boost!

 

More on Mindful Money:

Olympic sponsorship: Gold medal or wooden spoon?

London's Olympics won't deliver economic gold

3 reasons why hosting the Olympics is a loser's game

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