London will suffer from a post-Olympic depression

Among athletes, there is a condition known as Post-Olympic Depression Syndrome, or Pods for short. After two weeks of running around in magnificent stadiums, being treated like royalty by Olympic officials, cheered on by spectators, and feted by the media, the competitors often suffer an emotional crash when they have to go back to normal life.

For many of them, it will be their one and only moment in the spotlight. Yet Pods is a term that might just as well apply to the British economy. A host of economic studies have suggested that cities that host the Olympics suffer a sharp slowdown after the Games finish. London isn't likely to be an exception.

One of the many myths peddled by the cheerleaders of the Olympic Games is that it promotes economic growth. The reality is rather different. While there may be some short-term benefit it is hard to spend a few billion on new stadiums and transport without getting some growth as a result the evidence suggests that there is also a significant post-Olympic crash.

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China's GDP slowed sharply in the summer of 2008 as the impact of the Beijing Olympics wore off. In 2004, the Greek economy was growing at more than 5% a year (a feat that seems a long way in the past now). By 2005, when the Games had moved on, it was slumping. Sydney suffered a downturn after hosting the 2000 Olympics. In fact, just about every Olympic city has experienced a slowdown after the event is over. The reasons aren't hard to figure out.

In preparation for the Games, there is a massive building boom. The International Olympic Committee insists that new buildings are constructed for every sport. Building the Olympic Park has cost £2.3bn and the other venues another £1.3bn. You can't spend that kind of cash without giving some boost to your economy.

And it not just the stadiums. Plenty of other buildings have been upgraded to prepare for the ten million visitors the Games are expected to attract. Prestige projects, such as the Shard skyscraper, the tallest building in Europe, have been finished in a rush so they will be ready in time. London has seen forests of cranes and traffic jams of cement mixers as the final preparations are made. All of that has pumped money into the economy.

But what happens once it is over? True, there will be some ongoing work as the new buildings are converted. The Olympic Village is meant to be turned into a residential zone. But whether people really want to live in what will remain a run-down part of east London remains to be seen. The stadium is meant to be converted into a football ground, but could remain locked in the courts for years as Tottenham and West Ham fight over it. In reality, if east London was such a great place to invest, the private sector would have been building there a long time ago.

With most Olympic cities, promises of regeneration turn out to be hot air. Most of the buildings turn into white elephants, gathering dust until someone decides to knock them down. So while there might be some post-Olympics conversion work, in truth the sugar rush the Games have provided for the London economy will come to a sudden end after the closing ceremony on 12 August.

That's worrying. London has been about the only thing holding the UK economy up. "Add up the windfall of economic activity ahead of the Olympics, the surge of spending for the Diamond Jubilee, and now a rush of tourist spending during the Games themselves," notes High Frequency Economics in an analysis of the British economy, and Britain has had a huge boost. "If the economy turns out only flat after these extraordinary expenditures, you can expect it to fall like a stone after the fourth quarter after the Olympic lights go dark."

Unfortunately, that looks inevitable. There are no reliable month-by-month figures produced for London as opposed to the wider economy. But all the obvious measures, whether it is job creation, real wages or house prices, suggest that the capital has been doing pretty well this year while the rest of the economy stagnates.

True, London has plenty of enduring strengths. It is a world-class financial centre, even if the Libor scandal has tarnished that. It is a magnate for safe-haven money fleeing the turmoil in the eurozone. It is a leader in legal and business services, and increasingly in high-tech start-ups as well.

Yet the Olympics has given it a huge boost. As that comes to an end, it is likely that the London economy will flat-line at best. If London is flat-lining, then the weakness of the rest of Britain, which doesn't have any of the capital's competitive advantages, will be painfully exposed.

Add in the crisis in the eurozone, which is hardly going to help the British economy, and by the end of this year the economy will be contracting once again and potentially quite severely. The Bank of England can't cut interest rates anymore nor can it keep on printing unlimited quantities of money. It has been doing both without much impact. It is not just the athletes who may be suffering from Post-Olympic Depression Syndrome. Very soon we all will be.