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Originally published July 7, 2012 at 8:00 PM | Page modified July 8, 2012 at 1:10 PM

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Midyear report: Bumpy economy has a few favorable surprises

Eurozone, China, banking scandals major themes to watch for during second half of the year.

Special to The Seattle Times

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First, a midyear accountability report to readers:

On the eve of 2012, I looked at a few predictions. Merrill Lynch warned that "investors should expect another turbulent year." Economist Nouriel Roubini put the odds of a recession at 60 percent because of the crisis in Europe and government cuts.

So far, so not bad.

On the other hand, the Atlantic, in its "wild" predictions, saw Microsoft becoming the company of the year, buying Nokia to build a better smartphone than Apple. A tablet is coming. Windows 8 is coming. But the $6.2 billion aQuantive write-down pretty much disqualifies Microsoft from renewed financial greatness this year.

I didn't predict but laid down some markers: The euro mess, geopolitical instability in North Korea and Iran, a potential China slowdown and very slow growth in the United States.

The good news: North Korea and Iran are still at peace. Predictions of an Israeli strike by June to prevent Iran from gaining nuclear weapons didn't materialize.

Another favorable development is that the housing market finally seems to be hitting bottom. While new housing construction will not be the driver it was during the bubble, at least the overall industry is not the cancerous drag it was for years after the collapse.

Speaking of real estate and construction, back in late December, I didn't fully appreciate the so-called Amazon Effect. The initial dozen buildings in South Lake Union were only the start of a boom that is expected to include three skyline-changing towers in the Denny Triangle.

Underscoring the importance of a major headquarters to a city, Amazon's growth is encouraging developers to build nearby apartment towers and at least one major condo project.

Meanwhile, over in Bellevue, the first tower in four years, apartments again, broke ground in May.

Despite this, the industry still faces huge hurdles, including high debt and the risk of overbuilding apartments. Approximately $1.5 trillion in commercial real-estate mortgage debt is coming due nationally over the next three years. A Goldman Sachs affiliate defaulted on $900 million in loans this spring that it used to buy 11 Seattle-area buildings. It lost control of the buildings last week and a judge has appointed a receiver for the portfolio.

Boeing is humming and hiring. That Puget Sound happy dance must be tempered with Airbus' intention to build an assembly in Alabama.

At the start of the year, the biggest danger to Washington's trade economy was the threat of a slowdown in China. That remains true, but another risk emerged as the Grand Alliance shipping lines dumped the Port of Seattle for Tacoma, taking a sizable chunk of container business.

That's not a loss for the region. It did highlight the testy, counterproductive competition between the two ports as the Puget Sound is losing market share, a wider Panama Canal will change shipping patterns and Prince Rupert, B.C., is poised to take more of our container business.

Here are a few markers for the second half of 2012:

• Just because the eurozone has defied dire predictions for a couple of years doesn't mean the situation is better than it appears in the media. If anything, it may be worse. But it is cloaked in complexity, especially involving the banks, and the willingness of the stronger nations in the zone to do just enough to keep it together.

The reckoning is still out there. Much of Europe is already in a recession. Now Germany is seeing a slowdown, from its banks that are exposed in Spain and elsewhere, and in the manufacturing exports that have been its backbone.

That probably won't mean a eurozone breakup this year. But the problem still exists and the threat of contagion to America remains.

• China, Washington's largest trading partner, is facing a serious slowdown. The nation is being hurt by slack demand from Europe and the United States, as well as Beijing clamping down on a real-estate bubble.

Fast economic growth in China is essential to the social peace that keeps the Communist Party in power. Slower growth, as well as popular anger over corruption and pollution, is giving rise to more protests, including a large riot in the southern town of Shaxi recently. This complicates an already unsettled leadership change in Beijing marred by the fall of Chongqing party boss Bo Xilai, once a powerful and popular comer.

• We'll have our own opportunity for leadership change in November, and the coming election promises continued paralysis in D.C.

The big question will be whether growth slows further, and with it a chance to make inroads against high unemployment. There is also the threat of large, automatic budget cuts at the end of the year causing recession if Congress and the president can't agree on a path forward.

I feel comfortable making one fearless prediction: We will be treated to another scandal involving big banks in the second half of 2012.

Unlike the big bankers, I like to play the safe odds.

You may reach Jon Talton at jtalton@seattletimes.com.

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About Jon Talton

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@seattletimes.com

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