David Prosser's Outlook: Why going for Olympic gold could leave us all feeling worse off in 2012

While China's weightlifters were extending the host nation's lead at the Beijing Olympics yesterday, the country's stock market was heading rapidly in the opposite direction. The Shanghai stock exchange fell 5 per cent, with the market closing at its lowest level since the end of 2006.

The biggest single factor in the slide was a report from Goldman Sachs, which rather ignobly pointed out that, while China is busy impressing the world with its hosting of the games, its economy is suffering. Sour grapes from the Americans, who are surely feeling the medals table pressure? Maybe, but a cautionary tale for London 2012 nonetheless.

China always expected to take a short-term hit from the Olympics. The restrictions on construction, factories, cars in Beijing and mining, and five neighbouring provinces, are helping to reduce pollution but also acting as a major brake on production in an area of China that generates a quarter of national economic output.

The Chinese had assumed that increases in production elsewhere in the country, as well as a boost from Olympics-related tourism, would compensate, but Goldman Sachs says there is little evidence of either. The investment bank thinks China's economy will slow markedly this month, with little improvement in September, when the country hosts the Paralympics.

Now, while London may not be the cleanest place in the world, it won't have to shut down factories when it hosts the 2012 Olympics. But that doesn't mean the country won't suffer from a similar phenomenon. The negative impact that the Olympics can have on the economy of the host nation is well documented.

Indeed, the economies of South Korea (hosts in 1988), Spain (1992) and Greece (2004) all suffered a slowdown that continued for some time after the games had finished. And research from the Swiss investment bank UBS should worry us – it concludes that the higher the population of the host city relative to the country's total population, the more serious the effect of the games on the economy. With London accounting for well over 10 per cent of the UK's population – compared with Beijing's 1.1 per cent of China's people – this is not a happy thesis.

There are all sorts of theories about why Olympic Games so often have a negative impact. The vast cost of hosting the games, with much of the money coming from the public purse, is one problem. A more serious issue seems to be that during the five years spent planning an Olympics, key decision-makers do not deal with more fundamental problems.

Moreover, the decisions taken on public policy issues such as energy policy, security, transport and infrastructure may even end up skewed towards the short-term needs of an Olympic Games. Sometimes those priorities are in step with longer-term needs, but very often they are not.

Still, there is one happier thought for London 2012. At least the man in charge of organising the games will know a thing or two about the problems identified by Goldman Sachs. He is Paul Deighton, who was headhunted last year to run our preparations for four years' time, from – you've guessed it – Goldman Sachs.