The Influence of 2012 London Olympic Games on Britain's Economy - Case Study Example

The Influence of London Olympic Games on Britains Economy Overview In order to determine whether or not the London Olympic Games on the Economy of Britain, it is important to classify the types of economic benefits and costs that would provide basis for assessing the economic effects of the event upon the community or country that served as the venue. The following table is suggested as the model by which this assessment shall be made, as this has served useful in determining the effects of earlier Olympic games in their respective venues. Table 1: Key economic benefits and costs of the Games Benefits Costs Pre-Games Phase Tourism Construction activity Investment expenditure Preparatory operational costs (including bid costs) Lost benefits from displaced projects Games Phase Tourism Stadium & infrastructure Olympic jobs Revenues from Games (tickets, TV rights, sponsorship, etc.) Operational expenditure associated with Games Congestion Lost benefits from displace projects Post-Games Phase Tourism Stadiums & infrastructure Human capital Urban regeneration International reputation Maintenance of stadiums and infrastructure Lost benefits from displace projects Source: PricewaterhouseCoopers European Economic Outlook June 2004, p. 27 The above model shows the comprehensive nature of the costs and benefits associated with the Olympic Games. Aside from the net cash receipts from the sale of tickets, there are the peripheral gains that should be attained in commercial activity of Olympic tourists, and the spending by both participants and spectators that were to spur local businesses. After the Olympics, further gains are to be had by the benefits of urban regeneration, which is the choice and development of depressed urban areas, making them the site, close to the site, of the Olympic infrastructure, so that after the Games, the newly developed property could be productively used either as new residential housing or new sites for commercial activity, thereby spurring growth. UK’s Economic Performance in 2012 The Gross Domestic Product (GDP) is comprised of household consumption, government spending, investment and net trade (exports less imports). Of all the components of GDP, household consumption is the largest which typically comprises 60% of the economy. Government usually takes up 23%, and investment 15%. The following graphs provide a graphic presentation of how the UK macro-economy performed on a quarterly basis for the past few years. Household consumption and government consumption Source: Economic indicators update, UK Govt The fourth quarter in 2012, the consumption rose by 0.2% in real terms compared to the third quarter 2012. According to the government Economic Outlook, this rate of growth has been the slowest for consumption since the fourth quarter 2011. The graph shows, however, that there is a spike in government consumption for the fourth quarter 2012, which amounts to a 0.6% rise over the previous quarter. During the same time, exports receded by 1.5%, as did imports by 1.2%. The next graph depicts the fluctuation in gross fixed capital formation (GFCF). This refers to the investment in buildings and machinery. The fourth quarter in 2012 saw GFCF fell by 0.4%, which is 1.7% higher than the preceding year. For the same quarter, business investment decreased by 1.2%, which is significant because this indicator (business investment) is a significant component of GFCF. The fact that the rate of decrease in business investment is three times the rate of decrease of GFCF means that capital formation in the UK is not being sustained by the private sector. Gross fixed capital formation Source: Economic indicators update, UK Govt The business sector is seen as the growth driver of the economy. The fact that business investment has fallen faster than public capital investment, is indicative of the likelihood of the reduction in productive capacity of the private sector. This, coupled with the fact that imports and exports have fallen over the same period, suggests that productive activity will most likely tend to shrink rather than expand, since imports primarily are composed of raw materials for manufacture and industry. If net capital assets are not being formed and imported raw materials are dropping in volume, it is likely that a broad-based production led recovery is not yet feasible. The components of GDP are shown in the following table. The data therein support the preceding analysis concerning the contraction in exports, imports, the GFCF, and the overall GDP. Components of GDP % change on previous quarter (real terms) Household consumption Government consumption GFCF Exports Imports GDP 2011 (annual % change) -1.3% -0.1% -2.9% 4.6% 0.5% 0.9% 2012 (annual % change) 1.0% 2.6% 1.4% -0.3% 2.0% 0.2% 2011 Q3 -0.2% 0.1% 0.3% 0.0% 0.1% 0.6% 2011 Q4 0.2% -0.1% -0.4% 2.9% 1.6% -0.3% 2012 Q1 0.5% 3.3% 0.6% -1.5% 0.0% -0.1% 2012 Q2 0.5% -1.6% 2.0% -1.3% 1.3% -0.4% 2012 Q3 0.3% 0.5% -0.6% 1.7% 0.3% 1.0% 2012 Q4 0.2% 0.6% -0.4% -1.5% -1.2% -0.3% Source: ONS series ABJR, NMRY, NPQT, IKBK, KBL, and ABMI Note: (a) gross fixed capital formation From the growth rates of the components of the GDP reflected in the table above, the third and fourth quarters are particularly significant, because the Olympic Games took place in August, the middle of the third quarter. In the three quarter leading to 2012 Q3, the GDP was consistently negative, and contracted fastest in the second quarter, just before the Olympic Games. During the Olympics, however, the GDP rebounded by 1.0% which is primarily attributable to the Olympics, according to the UK Economic Outlook released in November 2012. The 1% jump is a sizeable rate, comparing the GDP rates forwards and backwards, and gave fuel to some hope that the recession was truly over (Flanders, 2012). By the fourth quarter, however, the GDP returned to negative growth rate. The growth rates of exports mirrored the GDP from the first quarter, falling for Q1 through Q2, recovering to positive growth during the Olympics, then returning to negative growth in the fourth quarter. What appears significant, however, is that imports, which had consistently been positive or at least flat prior to the fourth quarter, began contracting after the Olympics. Recalling its connection to raw materials to production, this is a development of great concern. From the table, it appears that what is presently sustaining the GDP is the government consumption, and to a lesser extent household consumption. Drop in volume of visitors During the Olympics, the expected rise in the number of tourists around London has not materialized. Instead, there was an evident lack of visitors among the hospitality and entertainment establishments. Data shows London attracted 590,000 people who visited for the purpose of either participating in or attending a ticketed event at the 2012 Olympic Games. The Office of National Statistics stated that for the entire month of August, more than 3 million overseas residents visited Britain. The statistic is actually lower than the number of visitors for the same month in the previous year, by as much as 5 percent. Contrary to expectations, attendance did not significantly rise in London’s theatres and museums, and the transportation systems (buses and trains) saw no significant rise in passengers. One explanation was that the expected deluge of visitors to Britain as a result of the Olympics caused more of the regular yearly visitors to stay away to for this year, to avoid the visitors as well as avoid having to pay higher for hospitality services because the visitors’ expected strong demand was speculated to push prices higher. According to Howard Archer , economist at investment firm HIS Global insight, another likely cause of the less-than-expected number of visitors is the likelihood that the sluggish economic conditions in those parts of the world discouraged foreign tours in order to save money. He stated that despite weak volumes, there was definitely increased spending by foreign visitors to the UK in August 2012, and the Olympic Games and Paralympics are the direct cause of this (Telegraph, 2012). Jump in tourist spending While number of visitors dropped, they are estimated to have spent an average of ₤1,290 each for the duration of their visit, compared to the ₤650 that the regular visitors normally spend. While the number of visitors dropped by 5 percent, Britain’s earnings rose by 9 percent from the previous year. The earnings figure is based on Olympic and Paralympic tickets that were bought and sold before and during the games (Telegraph, 2012). As the pound recedes in value, analysts have observed that the slump in domestic demand is compensated by the rise in spending by foreign tourists. According to one analyst, Jason Conibear, speaking on behalf of Cambridge Mercantile Corp., a major financial services company, “The pound’s sustained weakness continues to be one of the UK tourist industry’s greatest assets…More foreigners are visiting the UK, and crucially they are spending more. The 5 percent jump in tourist spending over the past year is in stark contrast to timid domestic demand.” (Telegraph, 2012). Economic impacts attributable to the London Olympics Given that there appears to be a positive impact in the form of gross commercial receipts from ticket sales and establishments, the question turns to the other end of the equation, which is the cost that it took to host the Olympics. There were substantial expenditures on ‘facilities, transport infrastructure, safety measures, housing and maintenance’ which eventually totaled ₤9.325 billion. Actual expenditures exceeded the projected budget by ₤5.906 billion at the time the bid was made in November 2004 (Bazlyankova, 2012). The discrepancies are traceable to, among other things, a twelve-fold increase in management costs, and a doubling of the security expenses (UK Parliament, 2012). A quick look at the cost and benefits incurred during the period is shown in the visual presentation in the Appendix. The presentation breaks down the costs expended for the event as follows: Breakdown of expenditures according to purpose Purpose Amount Core Olympic Costs ₤ 3.081 billion Infrastructure and regeneration ₤1.673 billion Contingency ₤500 million Other (Non-ODA) Olympic ₤388 million Policing and wider security ₤600 million Tax ₤836 million Programme Contingency ₤2.247 billion Source: Bazlyankova, 2012 According to the official report on the Olympics (UK Parliament, 2012), the following benefits justify the fact that the end-total expenditures are almost double that which was originally budgeted when the bid was made in 2004. These are: Long-term effects of the economic benefits of the 2012 Olympics Nature of the benefit Amount Total stimulus for the economy ₤ 5.1 billion Increase in economic output per year ₤1.37 billion Additional income for UK residents per year ₤296 million Percent of overall expected growth of the national economy 3.5 % Additional jobs per year 17,900 Source: UK Parliament 2012 While the figures released are official, they are still largely speculative because the long-term effects will not be known until well into the next few years. Summary analysis of findings The initial figures out for the London Olympics show for a fact that: (1) the final expenditure was nearly double the initial estimate when the bid was made; (2) the expenses were defrayed mainly by the central government, assisted by contributions from the national lottery, the Greater London Authority, and a comparatively small amount, ₤250 million, by the London Development Agency; (3) other than the core Olympic costs, expenses principally went to programme contingency, and infrastructure and regeneration, the latter amounting to ₤1.67 billion; (4) the total number of visitors fell contrary to expectations; and (5) total amount of cash receipts from visitors on account of the Olympics (due to ticket pre-sales and sales) exceeded expectations despite the fewer number of visitors. Tentatively, the government estimates were optimistic that long-term benefits to the economy would be substantial, attributing ₤5.1 billion to total stimulus for the economy that was brought by the Olympics, and an increase in economic output per year of a little over one-fourth of the figure attributed to the stimulus. Long-term growth of the economy as a result of the event was pegged at 3.5%. In retrospect, however, the estimated figures may be highly speculative; just one quarter after the Olympics, figures show a contraction in the economy by one-third of one percent, and across-the-board drops for exports, imports, gross capital formation, except for consumption both government and household. While consumption grew, the rate of growth was largely minimal and may not substantially create meaningful long-term growth. Also, the drop in imports of raw materials and gross capital formation signal an imminent slowdown in production, or flat productivity at best. 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Appendix Economic Impact of the 2012 London Olympics (Bazlyankova, 20 Aug 2012) Read More