World Cup: Kicking Off Economic Growth

Will the 2006 World Cup in Germany provide a much needed boost to the economy?

April 5, 2006

Will the 2006 World Cup in Germany provide a much needed boost to the economy?

Assessing the impact of major sports events is not easy. The last World Cup in 2002 spanned over two countries, Japan and South Korea, thus blurring the conclusions for a single host nation.

However, the previous World Cup tournament, in France in 1998, does provide Germany with a benchmark. Hosting the event helped France’s domestic economy weather a global downturn.

The event triggered a bout of spending frenzy, in particular as consumers purchased new audio/TV systems and other electronic equipment. A similar effect was noted in the United Kingdom when it hosted the European football championships two years earlier.

Altogether, French private consumption grew 1.5% in the spring quarter of 1998 — one of its strongest increases on record. Importantly, the boost took place ahead of the event, and was thus not related to the outcome itself.

France eventually became the world soccer champion that year This bodes well for Germany, the host of the 2006 World Cup. Since a victory in the tournament is far from certain, it is helpful to show that an economic stimulus does not depend on a tournament victory.

In France, preparations for the 1998 competition involved several multi-billion euro infrastructure projects. However, these took place well in advance of the event and were so well spread over time that the economic impact was hardly visible.

In addition, that expenditure came at a time when France’s budget policy was tightened sharply (with massive cutbacks in other component of government outlays) — so that the trend in government investment remained weak overall in the run-up to the 1998 tournament.

Whether hosting the World Cup would deliver a boost for tourism revenues was hotly debated in France at the time. Looking back, there is no sign whatsoever of such a positive effect.

In fact, it may in the end have proven a slight drag. Given that France is a traditional tourist destination (tourism-related expenditures make up almost 7% of GDP), it may have been the case that World-Cup related tourism flows crowded out others.

Events such as the World Cup can also lead to temporary price adjustments. However, looking bat the one component of the Consumer Price Index that would be most prone to such effects — namely prices in hotels, restaurants and cafés — there is no evidence of such an impact. The month-on-month increase was no higher than the usual seasonal effect in both June and July.

All in all, the example of France showed that large- scale global events like the World Cup can have measurable effects on GDP growth. However, the French experience cannot be simply applied to forecasts for Germany’s economic growth in 2006.
In 1998, France GDP growth was already robust, while in Germany GDP is expected to be fragile in 2006, mainly due to weak private consumption.

So far, a favorable impulse from preparations of the World Cup is hardly visible in Germany’s real economic indicators. With the competition itself to take place between June 9 and July 9, 2006, the lion’s share of the consumption impact on growth will be felt in the second quarter.

In order to assess the likely economic effects of the World Cup, we have made a number of assumptions to estimate the effect the competition is likely to have on German GDP growth in 2006:

  • The German team will reach at least the quarter-finals.
  • Roughly 3.5 million people will go to see the games, with about one million of them coming from abroad.
  • The number of overnight stays will increase by five million.
  • The average fan will spend about 150 euros per day.
  • The demand components which should benefit most are private consumption, investment and exports.

Private consumption should benefit considerably from the World Cup in 2006. Retail sales alone could rise by about 500 million euros because of spending by spectators and fans. And it is not only the "true" football fans who will spend more.

Even those who do not go to see the games could buy World Cup merchandise — or purchase new audio/TV equipment. In addition, simply hosting the competition will create a temporary rise in employment.

About 60,000 new jobs are expected, in particular in the services sector. Indeed, roughly one-third of these jobs will probably remain even after the World Cup is over. Most of these permanent jobs should be created in the security, catering and restaurant sectors.

This should, in turn, lift disposable income and private consumption. Overall, private consumption could increase by about 2–3 billion euros in 2006, with most of the boost occurring in the first half of 2006. Part of may well be funded by a fall in the savings ratio.

In addition, there may be indirect consumption effects via confidence. The consumer climate has brightened somewhat in the last few months, driven mainly by the more favorable labor market. Hosting an event such as the Soccer World Cup could provide an additional lift to consumer sentiment.

It is fair to say that should the German team exceed our assumption in the tournament itself, consumer confidence could get a further boost (as it did in France) — which would, in turn, add to consumption. By the same token, a surprisingly bad showing by the German team might dampen private consumption.

Overall, we estimate that the World Cup will add roughly 5 billion euros to German GDP in 2006. This is equivalent to a 0.25 percentage point increase in the country’s rate of growth.

On a final note, it is useful to point out that consumption and overnight stays by foreign football fans will not be registered as an increase in private consumption. Rather they figure as exports — since such expenditures are treated, for statistical purposes, as services exports.

Together with exports of merchandise and other services, this should lift German exports by about 2 billion euros. As tourism is less important in Germany than in France, the negative effect of this crowding-out of ordinary tourists by soccer fans should be less pronounced.

Not only are exports expected to rise, but imports should increase as well. After all, most of the World Cup merchandise is likely to be imported. Thus, the total growth effect of net exports is expected to be somewhat smaller. Overall, we expect a soccer-related contribution to Germany’s net exports of roughly 0.1 percentage points.

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