The 2015 Rugby World Cup is now well under-way, with record crowds, surprising results and some heartbreak. But what about the economic impact of the Rugby World Cup? Big sporting events bring in spectators (estimated to be 466,000), athletes and crucially they all spend money. But what happens when the host country doesn’t make it through? Unfortunately for all England fans out there, this is a very relevant question.
Go to the area surrounding a stadium on the day of a rugby world cup match and you will barely find a pub with any room to move. Spending on drinks and food in local pubs and restaurants on match days is extremely high and many hotels are at breaking point with reservations. Predictions were that there would be an increase in direct expenditure by international visitors of £869 million. A report by Ernst and Young looked at the Economic Impact of the Rugby World Cup 2015 and it provides detailed analysis of how such sporting events can generate benefits to the host nation. The highlights are:
- £2.2 billion of output into the economy
- £982 million of value added to national GDP
- £85 million in infrastructure
- 41,000 jobs across the country
- £1 billion of added value
But, what happens when you take out the host team? Suddenly we see less interest in the daily matches and the feel good spirit takes a dive. Of course, the other home teams are still around and English fans are being encouraged to support them, but commentators suggested that this early exit will have a significant economic impact. Alex Edmans from the London Business School suggests that when a host nation exits a rugby sporting event at an early stage, the pessimism can wipe 0.15% of the stock market the following day. This translates to around £3 billion for the UK. He noted:
A defeat makes investors more negative about life in general. If England were to lose, they wouldn’t just be negative about the England rugby team but also about economic outcomes in general.
Advertising revenues may also be hit, with a significant impact on ITV, who are showing all matches. With England out, the value of advertising slots has fallen and the advertising impact on some of the key England sponsors, such as O2, may be significant. However, English ticket holders may use this as an opportunity to make money, selling on their tickets to fans of surviving teams! The following articles and report from Ernst and Young consider this latest major sporting event that has come to the UK.
Articles
The Economic Impact of Rugby World Cup 2015 Ernst and Young 2014
An England Rugby World Cup exit could have knock-on effect for our stock market The Guardian, Sean Farrell (1/10/15)
Brands cheer on Rugby World Cup in face of England’s exit Financial Times, Malcolm Moore (4/10/15)
Rugby World Cup 2015: Early England exit could cost country £3bn International Business Times, Alfred Joyner (6/10/15)
Rugby World Cup brands play down commercial losses of England’s ‘lacklustre’ exit The Drum, Seb Joseph (5/10/15)
Questions
- What is an Economic Impact Analysis?
- How would you estimate the size of the multiplier effect of a sporting event, such as the Rugby World Cup?
- Following England’s exit, what happened to the stock market?
- How will media companies be affected by the Rugby World Cup and by England’s exit?
- Why do emotions affect the stock market?
- Do you think England’s exit will lead to greater spending in other parts of the country, such as Scotland and Wales, as England fans defect?
As we saw in Part 1 of this blog, oil prices have fallen by some 46% in the past five months. In that blog we looked at the implications for fuel prices. Here we look at the broader implications for the global economy? Is it good or bad news – or both?
First we’ll look at the oil-importing countries. To some extent the lower oil price is a reflection of weak global demand as many countries still struggle to recover from recession. If the lower price boosts demand, this may then cause the oil price to rise again. At first sight, this might seem merely to return the world economy to the position before the oil price started falling: a leftward shift in the demand for oil curve, followed by a rightward shift back to where it was. However, the boost to demand in the short term may act as a ‘pump primer’. 
The higher aggregate demand may result in a multiplier effect and cause a sustained increase in output, especially if it stimulates a rise in investment through rising confidence and the accelerator, and thereby increases capacity and hence potential GDP.
But the fall in the oil price is only partly the result of weak demand. It is mainly the result of increased supply as new sources of oil come on stream, and especially shale oil from the USA. Given that OPEC has stated that it will not cut its production, even if the crude price falls to $40 per barrel, the effect has been a shift in the oil supply curve to the right that will remain for some time.
So even if the leftward shift in demand is soon reversed so that there is then some rise in oil prices again, it is unlikely that prices will rise back to where they were. Perhaps, as the diagram illustrates, the price will rise to around $70 per barrel. It could be higher if world demand grows very rapidly, or if some sources of supply go off stream because at such prices they are unprofitable.
The effect on oil exporting countries has been negative. The most extreme case is Russia, where for each $10 fall in the price of oil, its growth rate falls by around 1.4 percentage points (see). Although the overall effect on global growth is still likely to be positive, the lower oil price could lead to a significant cut in investment in new oil wells. North sea producers are predicting a substantial cut in investment. Even shale oil producers in the USA, where the marginal cost of extracting oil from existing sources is only around $10 to £20 per barrel, need a price of around $70 or more to make investment in new sources profitable. What is more, typical shale wells have a life of only two or three years and so lack of investment would relatively quickly lead to shale oil production drying up.
The implication of this is that although there has been a rightward shift in the short-run supply curve, if price remains low the curve could shift back again, meaning that the long-run supply curve is much more elastic. This could push prices back up towards $100 if global demand continues to expand.
This can be illustrated in the diagram. The starting point is mid-2014. Global demand and supply are D1 and S1; price is $112 per barrel and output is Q1. Demand now shifts to the left and supply to the right to D2 and S2 respectively. Price falls to $60 per barrel and, given the bigger shift in supply than demand, output rises to Q2. At $60 per barrel, however, output of Q2 cannot be sustained. Thus at $60, long-run supply (shown by SL) is only Q4.
But assuming the global economy grows over the coming months, demand shifts to the right: say, to D3. Assume that it pushes price up to $100 per barrel. This gives a short-run output of Q3, but at that price it is likely that supply will be sustainable in the long run as it makes investment sufficiently profitable. Thus curve D3 intersects with both S2 and SL at this price and quantity.
The articles below look at the gainers and losers and at the longer-term effects.
Articles
Where will the oil price settle? BBC News, Robert Peston (22/12/14)
Falling oil prices: Who are the winners and losers? BBC News, Tim Bowler (16/12/14)
Why the oil price is falling The Economist (8/12/14)
The new economics of oil: Sheikhs v shale The Economist (6/12/14)
Shale oil: In a bind The Economist (6/12/14)
Falling Oil Price slows US Fracking Oil-price.net, Steve Austin (8/12/14)
Oil Price Drop Highlights Need for Diversity in Gulf Economies IMF Survey (23/12/14)
Lower oil prices boosting global economy: IMF Argus Media (23/12/14)
Collapse in oil prices: producers howl, consumers cheer, economists fret The Guardian (16/12/14)
North Sea oilfields ‘near collapse’ after price nosedive The Telegraph, Andrew Critchlow (18/12/14)
How oil price fall will affect crude exporters – and the rest of us The Observer, Phillip Inman (21/12/14)
Cheaper oil could damage renewable energies, says Richard Branson The Guardian,
Richard Branson: ‘Governments are going to have to think hard how to adapt to low oil prices.’ John Vidal (16/12/14)
Data
Brent crude prices U.S. Energy Information Administration (select daily, weekly, monthly or annual data and then download to Excel)
Brent Oil Historical Data Investing.com (select daily, weekly, or monthly data and time period)
Questions
- What would determine the size of the global multiplier effect from the cut in oil prices?
- Where is the oil price likely to settle in (a) six months’ time; (b) two years’ time? What factors are you taking into account in deciding your answer?
- Why, if the average cost of producing oil from a given well is $70, might it still be worth pumping oil and selling it at a price of $30?
- How does speculation affect oil prices?
- Why has OPEC decided not to cut oil production even though this is likely to drive the price lower?
- With Brent crude at around $60 per barrel, what should North Sea oil producers do?
- If falling oil prices lead some oil-importing countries into deflation, what will be the likely macroeconomic impacts?
I found this interesting article on the BBC News website about three students in Nigeria who have created an online job search company. Only five years later, this company now is valued in the millions and employs over 100 people.
The article below contains some interesting insights into the Nigerian job market and the key to success for this company. In particular, they note the effect of the multiplier through job creation and how this has been used to benefit the wider economy. This is particularly pertinent given the severe unemployment problem that has affected this African economy. It has helped 35,000 people to find jobs in the past two years.
How three students created Nigeria’s online jobs giant BBC News, Jason Boswell (2/9/14)
Questions
- What are the main causes of the unemployment problem in Nigeria?
- The company itself employs hundreds of people, but indirect employment effects have also occurred. How has this happened?
- How important are entrepreneurs in African countries as a means of helping their development?
While much of the UK is struggling to recover from recession, the London economy is growing strongly. This is reflected in strong investment, a growth in jobs and rapidly rising house prices.
There are considerable external economies of scale for businesses locating in London. There is a pool of trained labour and complementary companies providing inputs and services are located in close proximity. Firms create positive externalities to the benefit of other firms in the same industry or allied industries.
London is a magnet for entrepreneurs and highly qualified people. Innovative ideas and business opportunities flow from both business dealings and social interactions. As Boris Johnson says in the podcast, “It’s like a cyclotron on bright people… People who meet each other and spark off each other, and that’s when you get the explosion of innovation.”
Then there is a regional multiplier effect. As the London economy grows, so people move to London, thereby increasing consumption and stimulating further production and further employment. Firms may choose to relocate to London to take advantage of its buoyant economy. There is also an accelerator effect as a booming London encourages increased investment in the capital, further stimulating economic growth.
But the movement of labour and capital to London can dampen recovery in other parts of the economy and create a growing divide between London and other parts of the UK, such as the north of England.
The podcast examines ‘agglomeration‘ in London and how company success breeds success of other companies. It also looks at some of the downsides.
Podcast
Boris Johnson: London is cyclotron on bright people BBC Today Programme, Evan Davis (3/3/14)
Articles
London will always win over the rest of the UK The Telegraph, Alwyn Turner (2/3/14)
Evan Davis’s Mind The Gap – the view from Manchester The Guardian, Helen Pidd (4/3/14)
London incubating a new economy London Evening Standard, Phil Cooper (Founder of Kippsy.com) (10/2/14)
Reports and data
London Analysis, Small and Large Firms in London, 2001 to 2012 ONS (8/8/13)
Regional Labour Market Statistics, February 2014 ONS (19/2/14)
London Indicators from Labour Market Statistics (11 Excel worksheets) ONS (19/2/14)
Annual Business Survey, 2011 Regional Results ONS (25/7/13)
Economies of agglomeration Wikipedia
Questions
- Distinguish between internal and external economies of scale.
- Why is London such an attractive location for companies?
- Are there any external diseconomies of scale from locating in London?
- In what ways does the expansion of London (a) help and (b) hinder growth in the rest of the UK?
- Examine the labour statistics (in the links above) for London and the rest of the UK and describe and explain the differences.
HS2 has been a controversial topic for some time now. Between the disruption it would cause to countless neighbourhoods and the protests that have emerged and the debate about the cost effectiveness of the project, it’s been in the news a fair amount. The transport network in the UK needs improving, not only for businesses located here, but also to encourage more investment into the country. HS2 is one of the solutions offered.
The latest estimate for the cost of HS2 is over £40 billion. However, many suggest that the benefits HS2 will bring do not cover the full costs. Furthermore, as noted above, other concerns include the disruption that it will bring to countless households who will be living along the proposed routes. Cost benefit analysis have been carried out to determine the viability of the project, but they are invariably difficult to do. As they involve determining all of the private and social costs and benefits and putting a monetary estimate onto them, there will inevitably be factors that are over-looked, under-estimated or over-estimated. The suggestions here are that the costs have been under-estimated and the benefits over-estimated.
In September, KPMG produced a report that estimated the overall benefit to the UK economy would be a boost to growth of 0.8%, which would benefit many businesses and communities. The British Chambers of Commerce said:
Business communities in dozens of cities and towns, from many parts of the UK, remain strongly supportive of HS2.
The railway network is also approaching full capacity and this is one of the reasons why HS2 has been proposed. A government source said:
We need to do something because our railways are nearly full, but the alternative to HS2 is a patch and mend job that would cause 14 years of gridlock, hellish journeys and rail replacement buses … The three main routes to the north would be crippled and the economy would be damaged.
However, this report has faced criticism, in particular because it ignored a variety of supply-side constraints and because they argue it would be more effective to simply update the existing network. 
However, a new government-commissioned report has suggested that this alternative to HS2 would involve 14 years of weekend route closures and much longer journey times. However, those in favour of updating existing routes have said that this new report commissioned by the government is ‘a complete fabrication’. Hilary Wharf of the HS2 Action Alliance commented:
This government-funded report is a complete fabrication. The main alternative to HS2 involves longer trains and reduced first-class capacity to provide more standard class seats…No work is required at Euston to deliver the necessary capacity increase. Work is only required at three locations on the WCML [West Coast Main Line], and this is comparable to the work being carried out on the route at present.
The debate regarding HS2 will continue for the time being and it is just another area that is fuelling the political playing field. Whatever is done, the rail network certainly requires investment, whether it is through HS2 or upgrades to the existing routes. The following reports and articles consider the latest developments and controversy regarding HS2.
Reports
HS2 Cost and Risk model Report: A report to Government by HS2 ltd HS2 Ltd March 2012
High Speed 2 (HS2) Limited: HS2 Regional Economic Impacts KPMG September 2013
Draft Environmental Statement: Phase One: Engine for Growth HS2 May 2013
Updated Economic Case for HS2 HS2 August 2012
Articles
HS2 alternative ‘would mean years of rail disruption’ BBC News (28/10/13)
Alternative to HS2 would see Britain suffer 14 years of rail misery, says Coalition Independent, Nigel Morris (28/10/13)
HS2 alternatives could require 14 years of weekend rail closures The Guardian, Rajeev Syal (28/10/13)
Passengers ‘face 14 years of chaos if HS2 is derailed’: ‘Unattractive’ package of closures would be needed to expand capacity if Labour withdraws support Mail Online, Jason Groves (28/10/13)
HS2: Labour to examine cheaper rival plan The Telegraph, Tim Ross and Andrew Gilligan (27/10/13)
Britain’s railways have become mere outposts of other nations’ empires The Guardian, John Harris (28/10/13)
’Years of delays’ if government backs down on HS2 rail project Financial Times, Kiran Stacey and Brian Gloom (28/10/13)
Questions
- What is a cost-benefit analysis? Explain the steps that are involved in any cost-benefit analysis.
- Conduct a cost-benefit analysis for HS2. Ensure that you differentiate between costs and benefits and between private and social concepts.
- How can we measure the costs and benefits of HS2?
- Explain how HS2 is expected to boost economic growth. Use the AD/AS model to illustrate this.
- To what extent is there likely to be a multiplier effect from HS2? Is it likely to benefit the whole economy or just those areas where the route lies?
- Conduct a cost-benefit analysis for the alternative suggestion. Which do you think is likely to be more feasible? Explain your answer.
- How will improvements to the rail network or the investment of HS2 benefit businesses in the UK economy?
