Two stories have featured prominently in the news in the past 24 hours: first, that the UK has fallen deeper into recession and second, that hosting the Olympics — with its “Zil lanes" and other travel disruptions — is turning out to be much more hassle than it’s worth. But before a general sense of gloom settles over the nation, it’s worth highlighting that both stories are misleading in important respects.
Let us focus first on the news that GDP fell by 0.7 per cent in the second quarter. The Office for National Statistics suggests that its initial estimate is subject to “greater uncertainty than usual", because of the Diamond Jubilee holiday and the effect of unusually bad weather.
What is notable about this is that the “usual" uncertainty surrounding the ONS’s early estimates is already pretty large. Over the past 10 years the average revision to its initial estimate has been 0.4 percentage points and on seven occasions (out of last 40) the data have been revised by 0.7 percentage points or more. With the biggest revisions generally occurring two to three years after the initial release, we’ll have to wait to form an accurate picture of the health of the economy from the “official" data.
While we are waiting, a number of other indicators — such as labour market data and private sector surveys — generally provide a more accurate picture of what is really happening. And it is very difficult to reconcile the relative strength of these with the 0.7 per cent shrinkage. Employment rose by 182,000 in the three months to May, unemployment fell from 8.3 per cent to 8.1 per cent, and most surveys are close to (but below) their long-term averages. While the UK economy is sluggish, it does not appear to be in recession.
The latest labour market figures also provide the first signs of a jobs boost from the Olympics, which brings me to the second story. While hosting the Games is expensive and disrupts travel and business, our analysis at Goldman Sachs suggests that it is likely to bring net economic benefits to the country.
The financing of the Games was — of course — not without controversy. At the time of London’s successful bid in 2005, the provisional estimate of the cost of hosting the Games was around £3 billion. This increased sharply to £9 billion in 2007, when the first fully detailed (ie, realistic) estimates of the total cost were provided.
But, relative to this revised benchmark, the management and cost-effectiveness of the Games preparation has been a success. The infrastructure was completed on time and the estimated total bill has declined to £8.5 billion, partly reflecting lower-than- expected construction costs.
The impact of this expenditure on public finances is limited — £8.5 billion represents 0.5 per cent of annual UK GDP and, over time, a significant portion of the Government’s bill is likely to be recouped through the sale of land and other facilities.
Moreover, too narrow a focus misses the wider impact that hosting the Olympics can have on the host nation, both short and long term. In the short term, Locog estimates that it is likely to spend about £2 billion in total — on temporary employment of staff, security, etc — with more than half of this likely to be spent within the third quarter of this year. Hoteliers, restaurateurs and retailers are also likely to enjoy greater demand from overseas visitors.
Set against this, the output of other businesses is likely to suffer from the transport disruption and some tourists will avoid coming to the UK because of the Olympics. We estimate that these effects will broadly even out, and that the overall short-term effect of staging the Games will be to boost UK output in the third quarter by about 0.3-0.4 percentage points.
There will also be a lasting impact on the local community in Stratford from regenerating a run-down part of East London. But there are other less tangible long-term benefits of hosting the Olympics that come from promoting the UK as a tourist venue and potential location for foreign investment. From today, starting with a jamboree at Lancaster House, and for the next three weeks, UK Trade & Investment is opening its doors to the world’s business leaders, capitalising on their presence at the Games.
In previous Olympics, where the preparations have gone well and costs have been controlled, there has been a lasting positive economic legacy. Most studies suggest that the Games in Beijing, Sydney, Atlanta, Barcelona, Seoul and Los Angeles brought broader benefits. The negative legacy from the 2004 Games in Athens appears to be the exception. Taking all the benefits together, we believe that the Government’s projection that £8.5 billion of investment will yield £13 billion is likely to be an underestimate.
But for sporting enthusiasts, perhaps the most important bottom line is this: on average, the host nation has won 54 per cent more medals than when it was not hosting the Games. If medals are your preferred currency, this represents a high return on investment.
Kevin Daly, Managing Director, Goldman Sachs Global Investment Research
Editor's comments - [ This article [above] appeared in the 26 July 2012 edition of The Times (UK) to coincide with the start of the 2012 Olympic Games in London. The video from the FT (12 July 2012). This report reveals what legacy in economic terms is the aspiration of government. ] Reference this?Cryer, J. (2012). This page title in italics. Retrieved date, from In the text: Cryer (2012)
Reference : Goldman Sachs.(2012). The Olympics and Economics 2012. London: Goldman Sachs Group Inc.
The above reference is in the APA style: See why this is important in our [how to reference] us guide.
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