Cup economics a mixed bag

14 June 2010 - 01:43 By unknown

The Big Read: Estimating the economic effects of events such as the World Cup is not easy. "Final" numbers always depend on the assumptions made in calculating the effects.

I have seen credible research that suggests that the World Cup will add about 0.5%to the GDP this year, all things being equal (the economic jargon for saying if nothing else changes).

While this may well prove to be accurate, it is quite clear that "all things being equal" is not the case. To the rest of the economy, the World Cup period will have similarities to the December period.

Leisure activities using facilities such as hotels and car rentals will do very well. However, the broader economy will experience a dip, from both a productivity and quality perspective.

Who, for instance, would like to buy a car assembled during this time? The best companies can hope for is to maintain output. There will be no expansions or additional work done. In many cases, the workplace has already been affected, with staff being afforded viewing and recreation facilities for the soccer.

This can be recognised as a salvage operation to try and achieve 60% or 80% output, rather than the zero that comes with absenteeism and other problem workplace behaviours.

While preparation for the World Cup has been cited as a boost for the economy, there must also be a realisation that this also subdued other parts of the economy.

Construction did very well out of the preparation stage, with new stadiums and related infrastructure. But this came at a cost to other parts of the economy. Allocating resources to build stadiums meant resources were taken from somewhere else.

The beautiful and gleaming stadiums will provide a long-standing testament to a very successful event but the price paid is that we have less of something else, whether it be schools, hospitals or houses.

However, at the time South Africa was awarded the right to stage the event, six long years ago, there were already emerging signs of infrastructure constraints.

A rebounding economy was rapidly taking up any infrastructure slack that had existed previously, and we became all too aware of these constraints when Eskom turned off the lights towards the end of 2007 and start of 2008, and then ''declared sanctions" against South Africa (well, the effect felt the same).

The prolonged growth cycle had become exhausted. But, in dealing with the infrastructure constraints, we had become too embroiled with a "debating" society.

A conference here, a fact finding mission there and throw in the assorted task teams and who knows, if enough of these things happen, a much needed power station or road might rise up from the earth.

The World Cup provided a much needed catalyst. In hosting the World Cup, Fifa did not want a debate about a stadium, or even a concept stadium.

They wanted real stadiums built with real cement, using real architects and civil engineers. And, by accepting the challenge, South Africa started to move from the debating society to real achievement.

The World Cup can be regarded as the motivation behindSouth Africa turning into a building site. Its legacy will be an im-proved infrastructure platform, which will be the platform for the next growth cycle that is starting to build.

The revamped roads are already a joy and the Gautrain is magnificent. These will be with us long after the final whistle.

Which highlights the next strange concept. Our economy will gain strength after the World Cup. There is quite widespread pessimism regarding the post-World Cup economy. However, the World Cup is not a profitable event.

The fact that the government is doing it and not the private sector is a clue. The economy reached a natural cyclical low late last year, and is experiencing a natural upturn.

The interest rate effect will start to kick in and the credit cycle will have turned up and become a tailwind, rather than a headwind.

Add the World Cup spending multipliers that will be working their way through the economy, and the second half of 2010 is expected to achieve stronger results than we have experienced over the past year.

This includes employment creation and infrastructure expansion - there is much more needed. None of this stops at the World Cup.

Even if the economic benefits are not clear-cut, we must also ask whether this is about the economy, or about South Africa in a broader sense.

We are hosting the World Cup. A magnificent World Cup.

A problem-free World Cup. Six years ago, the impossible World Cup (where are those critics now?). A showcase for the world in a country in which nothing broke during the global credit crisis of 2008.

And this is our legacy, where investor attention may gain more focus from more illustrious regions where things did break.

  • Hart is the chief strategist at Investment Solutions