The 23rd BABC Annual Economic Luncheon was held on Thursday January 24 at the City Club of San Francisco, sponsored by Squire Sanders.

2012 was an eventful period for the world economy and the fortunes for 2013 are far from certain. Here in the US the House has recently passed a bill to extend the nation’s debt limit until May, deferring a vicious budget debate and prolonging uncertainty once again. For the rest of the world the IMF has warned again of a weakening global economic recovery despite government efforts to stimulate growth – the global economy is likely to grow at a slower rate than previously forecast over the next two years, Eurozone expected to remain in recession in 2013, having previously predicted growth, UK’s growth forecasts have also been revised down. Countries like China, Germany and Brazil have been driving global growth but are looking like they’re losing steam. War and turmoil loom in the Middle East and North Africa. Here in the Bay Area on the other hand, the situation is looking stronger – in 2012 unemployment dipped below 10 % last month for the first time in four years.

This year we revamped our traditional format into a panel of expert economists – Gary Schlossberg of Wells Fargo, Sean Randolph of the Bay Area Economic Institute and Brian Lawson of Exclusive Analysis whose job was to use the economic outlook to predict concrete business risks and opportunities.

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Our moderator, Martin Giles, US Technology Correspondent of The Economist reflected that 2013 would have mixed prospects for triskaphobics (terrified of the number 13) and the ancient Egyptians (for whom it is lucky). Introducing the other speakers, he said, “it’s six years since the start of the financial crisis. But many worry whole swathes of the economy are trapped in Japanese style stagnation.’

Gary Schlossberg, Vice President and Senior Economist of Wells Capital Management – a fee-based, institutional money manager with over $350 billion in assets, described himself as “cautiously optimistic” about the year ahead.

“Some of my concerns from the last year are dissipating. For the fourth time in as many years, we have finished the year with the economy gathering momentum. Underlying demand, based on consumer spending, is good.

“The euro debt crisis is in remission. The European Central Bank has done a good job of putting a band aid over the problem. Immediate liquidity is still an issue though.”

After a sharp slowdown in the growth of the Chinese economy last year, Schlossberg noted many investors were concerned about the impact of a hard landing there. Momentum has been heavily driven by government stimulus there – but there are fears current growth rates, which picked up at the end of last year, may not be sustainable for much more than six months.

“China is a major growth engine of the global economy,” he said. “Many people have been concerned about how the global economy would be affected by that growth easing off.”

The looming US debt ceiling debate does not worry him unduly. “The Republicans stand to lose more out of a debt crisis if they prolong it.

“On the downside, there are the old problems – elections are approaching in Italy, we could see a change in government soon.

“In the US there is a real lingering concern over the budget. The fiscal cliff agreement signed at the 11th hour is leaving us with a real drag.

“However, it is the unexpected factors which we should be most concerned about in economic terms – surprises are always the worst.

“What will happen if the tremors in North Africa erupt further? The turmoil in the Middle East is another huge huge geopolitical hurdle, and in China, a big political transition is underway – how smooth a transition will that be?”

Schlossberg concluded his opening remarks with a positive summary of the outlook for the year ahead.

“The economy will gather momentum over the year to come,” he said.

“US interest rates will recover – they are artificially low at the moment. With the economy improving – calm in Europe, clarity over the US budget – there’s a chance that interest rates will firm up during the year.

“In terms of the longer view of the economy, we mustn’t look for a return to where we were four years ago. We’re still healing from the meltdown.

“Governments are still hugely in debt. There is a mismatch in the labor market in terms of the competition for the global economy and deregulation – keeping the lid on inflation also makes it hard for businesses to raise prices, therefore restraining growth in employment and wages”.

Sean Randolph, President & CEO of the Bay Area Council Economic Institute followed Gary Schlossberg’s opening with an analysis closer to home.

“California has an impressive rate of job growth,” Randolph explained, “faster than any other state apart from Texas and North Dakota – largely because of fracking. Every sector has made gains over the past year, although there have been job losses in state and local government and manufacturing.

“The gains have not been evenly spread across California – the Bay Area is doing the best overall, the OC and San Diego are doing pretty well. The main under-performing area is the Central Valley.

“Now it’s not about the north-south divide but coastal versus inland areas.”

The growth projections for the coming year bode very well for the state as a whole.

“Our projection over next year is that employment in California will increase by 1.15%. Personal income will grow by 2.2%.

“The balanced budget is very good news – we’re now heading towards covering the deficit. For the last ten years we had have had fabricated budget coming out of Sacramento. This year the official Legislative Analysts Office told us we have a real budget. Voters have also passed Prop 33, which was a vote to increasing taxes, stopping the decline. The general economic improvement economy is also helping refill the State’s coffers.”

The employment situation is even more impressive in the Bay Area than in California as a whole.

“In California overall unemployment is down 10% from its peak level,” Randolph said. “In San Francisco employment is down by only 1.4% of its peak level – and in San Jose it’s just 0.2%.

“Oakland is not doing so well, but overall the region has largely recovered the jobs that were lost. In the Bay Area, we’re expecting to see the economy growing by 3% over the next year and 2.2% job growth.”

The housing market, which was the epicentre of the original economic crash, has also been showing definite signs of recovery.

“Last year there was an increase of 8-26% increase which is the biggest increase we’ve seen since 2007,” Randolph explained. “Lots of homes are underwater – but there are fewer than there used to be and there is real investment there again.

In terms of investment, the Bay Area is buzzing once more. “Investment levels have returned to their peak,” Randolph continued. “Last year Silicon Valley captured 40% of all venture investment in US – an indication that companies are placing bets on innovative growth companies.

“Technology is a real jobs multiplier; it’s been calculated that every technology job supports 4.61 other jobs – from lawyers and accountants to barristas at Starbucks. The growth in technology dollars is driving the economy here as it is such a powerful driver of job creation.

“For me we’re out of the woods – but there’s still a way to go with housing and the construction industry in particular.”

Brian Lawson, Chief Global Economist of Exclusive Analysis, a specialist intelligence company that forecasts commercially relevant political and violent risks worldwide, flew in specially for the event from his home in Valencia, Spain.

“ At Exclusive Analysis we look into remote risk or violent, political risk,” Lawson began.

“The obvious violent risks are war, terror or kidnap. But you also need to look at the risk of theft, or the interruption of any stage of the supply chain. We’re not just dealing with national governments, but looking at the local risk factors at the level of municipalities and regions, local and indigenous issues. The question we ask is – what could go wrong? We map this on a global basis. Though it’s always fair to say that the risk that you don’t look at will be the one that blows up your project.

“Other non-violent political risks include contract renegotiation or asset appropriation. Bribery is illegal here – but how do you get round it in places like Bolivia, Venezuela or parts of Africa, where it is standard practice for operators? There are also big risks around taxation and currency, for example.”

Lawson moved on to give some specific examples of the kind of global risks organizations should look out for 2013.

“India is a major engine for growth – but recently has been suffering from slower growth that previously. The country is very worried about its trade deficit.

“One manifestation of this concern is the huge back-dated taxes enforced on Vodaphone recently. They want to address the trade deficit, so even though they are sucking in lots of IT from foreign companies, they are now demanding home produced content. Companies like IBM, Dell and Cisco now have to build a percentage of the computers to be sold in India, in India.”

Economic nationalism is an increasingly important factor to consider, and political influence – or interference – can show its hand in very different ways.

“In Britain, bankers are politely being told it would be a good thing if they lend more to SMEs, which not getting enough funding at the moment. The banks don’t want to lend more, as they’re busy trying to shrink their balance sheets. But they’re politely told by the government there will be a UK banking levy and ramifications on bonuses if they don’t comply with this nice request to loan more widely.

“In Spain six of the nine regional governments would be insolvent if Madrid hadn’t bailed them out – and they need financing. Spanish banks are politically run – when they aren’t complying with political needs, they are reminded who votes their directors onto their boards.

“In Argentina the political risk is much more apparent. Banks are required to lend 5% of their assets every year to ‘socially accepted projects’. YPF was nationalised by government at the start of last year.”

Sometimes even while a national government is in support of a particular investment, other more local factors can come into play.

“In Chile, for example, local people living near the proposed site of a large power station in the Atacama Desert recently complained about the project and provoked a judicial enquiry. The law upheld their objections, and the project – which is set to provide a significant proportion of the national power supply – has been delayed for two years.”

Lawson ended his presentation with a number of wildcard risks to throw into the mix.

“What if Iran allowed nuclear inspectors and their oil stocks were allowed to re-join global markets?,” he asked. “What would that do to the markets, the price of oil and the world economy as a whole?

“On another tack – what if there is was another really bad wheat crop in Russia or the Ukraine? What ramifications would that have?

“This is the hard task we have to establish where peril lies.”

Questions were asked about the potential repercussions of the US Debt Ceiling debate and risk of default, particularly in terms of America’s relationship with China.

“During the last struggle near default over debt ceiling, China was very angry,” Brian Lawson said. “The reaction was incredulity that the global economic leader could be so irresponsible as so come so close to default. At its peak, China owned $1.3 billion treasury bonds – that figure is now probably $1.13 billion.

Sean Randolph agreed with Lawson’s analysis: “The Chinese own a lot of financial market equities – they will be angry if there is a default and the economy is thrown into default again.

“More Chinese companies are becoming global players, and money is increasingly coming out of China into natural resources – largely in Canada and Africa, not yet in California yet. Here Chinese investment is more about the acquisition of companies in the tech space, particularly bio-technology and the life sciences.”

The possibility of the UK leaving the EU, following David Cameron’s announcement of a public referendum on the issue earlier that week, was another topical question.

“The British Prime Minister had no choice but to do this,” Brian Lawson answered. “The Tories are split over the issue of Europe. 100 MPs wrote a public letter requesting a referendum. A third of Tory voters said they would vote UKIP if there was no referendum. David Cameron had to offer one – otherwise he would split the party and face certain electoral defeat.

“Now he has the possibility to renegotiate the UK’s relationship with the EU. He also has time on his side – it’s two years until election day, and he didn’t promise a referendum until two years after that – so it wouldn’t be held until 2017 by the earliest. If the British people do vote to leave the EU, then there would be further renegotiation as well. ”

As Martin Giles observed however, the climate of uncertainly in the UK is not good for investors.

The panel were also asked about how the changing demography of the US population would impact the economy.

“This will have a real impact on the high tech economy,” Gary Schlossberg said. “Currently more than 50% of start-ups in Silicon Valley are founded by someone NOT from the US originally. How to encourage the continued influx of engineers and skilled workers is a very important question.”

Sean Randolph agreed immigration issues are having a real impact on the Californian economy. “The cap on H1B visas has been a problem for companies around the US,” he said. “In the past, big companies like Microsoft would go round universities across he world and search for prospects to hire – but now there just aren’t enough visas to go round. We need to know if we will get action on this front soon. Perhaps there could be a green card offered to people graduating with advanced degrees in the US in certain subjects in future.”

Big economic improvements for the US, California, and the Bay Area in particular, but plenty of opportunity for risk to rear its head across the world, with economic nationalism a particular trend in many areas. Here’s to a prosperous 2013 for all our members!

We would like to extend our warmest thanks to our speakers, and to our sponsors, Squire Sanders, for supporting the Annual Economic Luncheon. We look forward to next year’s event and hope to see you there!