The London 2012 Olympics will likely give the entire UK economy a boost in the third quarter, according to a new report from Goldman Sachs.
Goldman economist Kevin Daly estimates that additional Games-related spending will boost British gross domestic product (GDP) by 0.3 – 0.4 percentage points in the quarter. However, the report also notes that the short-term economic benefit from the Games will largely be reversed in Q4.
This estimate comes as the Office for National Statistics recently reported a sharp drop in economic activity in the UK in the second quarter. The country has now seen three consecutive quarters of economic decline, but perhaps the “Olympic effect” may be able to briefly lift the country out of its economic doldrums.
In terms of the London stock market, the Goldman Sachs report hints that the market could get a boost once the Olympics are over.
“Interestingly, all recent Olympic hosts have outperformed the MSCI World index in the 12 months following the Olympics,” write Goldman’s Francesco Garzarelli and George Cole. “This is true of recent hosts regardless of the size of the economy or state of development, suggesting either the local market is boosted by the international profile of the Games, or is perhaps relieved to have the Games behind them. Given the below-average performance in the UK since the Olympic announcement, UK investors may hope for a continuation of this trend, looking forward to a positive year in equities following the London 2012 Games.”
In terms of the financial rewards for hosting the Olympics, Daly notes that some of the Games have bled money while others have turned a profit. In the case of London, Daly says it’s too early to tell if the Games will make a profit or loss. However, the development and preparation for the Games should be considered a success, especially since the infrastructure for the Games was completed on time and below the 2007 budget, says Daly.
It’s also important to note that “in accounting for the cost of hosting an Olympics, most countries (including the UK) have treated the cost of constructing facilities and infrastructure, together with security and other ancillary costs, as being separate from the cost of running the Games themselves,” writes Daly. “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 (£8-9 billion) bill from construction, security and other costs.”
