Government action will be key in determining strength of recovery

An electronics store in Tokyo. Japan faces a fragile recovery in 2010. (AP)

Most of emerging Asia is expected to continue to outperform the rest of the world in 2010, but these markets have clearly not de-coupled from other countries.

Much of the growth in emerging Asia comes from domestic demand, rising trade, and investment flows between emerging regional economies and there is a clear shift from heavy dependence on exporting to the West, said the latest Economic Outlook report by Deloitte & Touche.

"The global economic recovery is well under way, but risks remain to the outlook and there could be bumps along the road. Business leaders should consider taking advantage of the imminent improvement in business conditions, as well as the very low cost of capital, by investing in new opportunities. Given the remaining risks, however, it makes sense to maintain a strong cash position and diversify risk. In addition, businesses should invest in ways that exploit the changing structure of the global economy," said Dr Ira Kalish, Director of Global Economics, Deloitte Research. Analysing issues attracting attention of investors and business leaders in 2010, Deloitte said in spite of a relatively rosy outlook in the US, serious risks threaten future recovery. These include high levels of household debt, possibly onerous government policies, poorly performing bank assets, and the potentially negative consequences of higher oil prices.

The US dollar will probably decline, which is a good thing from an export perspective as long as the decline is orderly, but the decline will not necessarily be inflationary. Moreover, the reserve currency status of the dollar is probably not threatened for a long time to come, said the report.

There is an intense interest – which in turn is fuelling a price rise – in gold. The demand is being driven by concerns about the US dollar, central bank acquisition of gold, the rise of gold exchange traded funds, and increased demand for gold by the rising middle classes of China and India, it noted.

The short-term outlook for the US economy is upbeat, yet, risks are also quite elevated, said the report.

According to Deloitte, China is likely to see a strong recovery in 2010, but is already facing an asset price bubble and the potential for future inflation owing to its fixed exchange rate policy.

China will start the process of appreciation once the recovery in the West shows strength. In addition, the Chinese government will wait for Western recovery as well before it reverses its stimulus policies, it said.

India, too, is expected to record a strong growth in 2010. This is supported by strength of domestic demand, the stability of the financial system, the lagged effects of aggressive monetary policy, and the confidence of foreign investors. On the other hand, India still faces risks including global economic weakness, inflationary pressures and political events, said the researchers.

While recovery for Japan is "fragile", Deloitte said Italy, Spain, Ireland and Greece are of particular concern. While the region's core economies of Germany and France have done better, they still face the challenge of shifting toward more domestic demand-driven growth.

For the UK, even as recovery will take hold in 2010, it will likely be weak, the researchers said. The problems include tight credit markets, lingering effects of excessive consumer debt, weak employment markets, and constraints on government spending – especially following a mid-year election.

"Now the uncertainty concerns the strength of the recovery, the future structure of the global economy, and the path of various asset prices, including interest rates, exchange rates, commodity prices, and general inflation. There is also uncertainty about what governments and central banks should and will do to exit the expansive paths they have taken. What they do will play a significant role in determining what happens next," said Dr Kalish.

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