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The Olympic Effect: Good for the Economy

How many of you were a bit skeptical at U.K. government claims that up to a million additional visitors, over and above normal tourist numbers, would be crowding in to London for the 2012 Olympics?

So beloved of the modern politician isn’t it, the unsubstantiated soundbite delivered for populist effect, bereft of any robust analysis or factual back-up. Anecdotal evidence suggests aggregate visitor numbers are down, as foreign visitors not wishing to get caught up in the U.K.’s supposedly creaking transport infrastructure choose to stay away.

London Buses Rain
Richard Newstead | Flickr | Getty Images
London Buses Rain

This is actually a non-story. Economists are keener to know what the impact of staging the Olympics will be on theU.K. economy, but this is a difficult analysis to conduct because, just as with quantitative easing , it is not straightforward to determine what the results would have been if the activity under review had not taken place.

Even without the Olympics, we would expect a positive GDP numberfor the third quarter, because the second quarter was impacted by having one fewer day of output due to the Queen’s Jubilee. But is the Olympic effect enough to turn GDP positive for the whole year? This will depend on the feel-good effect that arises after the games are over. Econometricians are not expecting the impact of extra games fans spending cash on burgers and beer to be significant. The key is the knock-on effect due to a rise in consumer confidence, which then leads to increased expenditure ranging from new gym memberships to booking next year’s holiday. The feel-good level is difficult to measure, let alone forecast.

Given that the U.K. is already in recession, and struggling to bring unemployment down, we would suggest that there is already a positive in hosting the games, as temporary vacancies increase and any additional output is better than nothing. The example usually cited here is of Spain in 1992, which did experience a nationwide boom after the Barcelona games. However it was not sustained. The example of Beijing in 2008 is not a worthy parallel, because that was a country already experiencing double-digit GDP growth. The UK games have cost about 10 billion pounds, which is considerable expense; is it worth this cost for a short-term statistical blip? After all, the problems plaguing the U.K. now, including labor market bottlenecks and difficulties in the SME sector, will still be with us in September.

But to concentrate purely on the statistics is to miss the point. A genuine feel-good factor can be very positive for the economy, not just in terms of higher spending but also in productivity at work, which in turn boosts output. A good example of this was cited in a study from the Social Issues Research Centre, which found that following the 1966 England world cup win those reporting a higher positive attitude in their employment was over 60 percent of the work force. And 10 billion pounds is the cost of just two years of operations in Afghanistan, for considerably less qualitative benefit to the UK taxpayer. It could end up looking extremely good value for money, especially if the UK finishes 3rd overall in the medal table.

So I expect that London 2012 just tips the balance towards an overall positive GDP number for the year as a whole. That’s a result. And as we’ve been talking about the Olympics, I thought I’d point out that Mo Farah and I have one thing in common: both of us came to this country when we were 8 years old. As he crossed the 10,000 meters final finish line, I was so happy I cried. Sometimes it’s good to forget the economics and just concentrate on the emotional…

Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.

"The views expressed in this article are an expression of the author’s personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment."

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