Asia predicted to lead global growth next year

The prolonged weakness in the US and Europe may be the least of Asia's troubles in 2011, economists say, as the region fights potentially destabilising inflationary pressures.

Asia will lead global growth in 2011, with China, now the world's second largest economy, steady at about 10% growth, the Government-affiliated Chinese Academy of Social Sciences forecasts.

With a strong rebound in the US or Europe just as unlikely as a relapse into a "double-dip" recession, Asia is easing its way out of stimulus programmes launched during the financial crisis.

But the US Federal Reserve's effort to nurture job creation through fresh "quantitative easing" has governments across the Pacific manoeuvring to keep price pressures from spiralling out of control.

"The inflation outlook is really critical at this point," UBS economist Duncan Wooldridge said in a recent conference call, noting that excluding Japan, consumer price inflation in Asia has been averaging about 5%.

"From my perspective, there's really only one thing that matters at this point: inflation," he said.

China's consumer price inflation surged to a 28-month high of 5.1% in November.

The Government raised interest rates in October for the first time since the financial crisis struck and has shifted to a "prudent" monetary policy for 2011 from one that was "relatively loose", signalling its intent to tighten credit as it fights price hikes.

Focusing on the politically sensitive food prices that are said to account for up to three-quarters of the latest inflationary spike, the Chinese Government ordered a crackdown on commodity speculation, price caps for edible oil and subsidies for the poor.

It is already claiming some success in reducing prices for some vegetables and fruits.

Meanwhile, the weather problems - like drought in south China and floods in Pakistan and Thailand - that have pushed food prices higher should moderate by mid-year, according to most forecasts.

But inflation remains a threat, especially for emerging economies that are attracting large inflows of money from investors seeking high returns.

The surging liquidity is adding to pressures on Asian economies to either raise interest rates or let currencies that already have gained substantially against the weak US dollar appreciate further.

"Emerging economies can stop inflation if they are determined," says Shanghai-based independent economist Andy Xie.

But he thinks an effective strategy would require raising exchange rates by up to 50% and interest rates by 10%.

"There is almost zero chance for them to pursue such a contractionary policy," he says.

Those options, while unpalatable, reflect the region's relative strength compared with the US, EU and Japan, says a report by Macquarie Securities.

"Treading the fine line between growth undershoot and inflation overshoot is a challenge that is particular to Asia," it says.

Japan, now the world's third largest economy after it was overtaken by China this year, faces no such dilemma.

Though its economy gained momentum in the third quarter, that is fading as slowing overseas demand and the strong yen bite into exports, while deflation continues to stymie growth.

With recession-stricken Americans unable to resume the kind of freewheeling spending that powered growth for much of the past two decades, the recovery increasingly hinges on Asian resilience.

"Asia is depending on demand in this part of the world," says David Cohen, a regional economist for Action Economic in Singapore.

"That's where it's going to have to come from."

So far, China's rebound has largely been powered by massive bank lending in support of government stimulus, backed by steady, double-digit growth in consumer spending.