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China, India to lead Asian recovery: Moody's

business Updated: Jun 08, 2010 23:27 IST

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Led by China and India, most of the Asian economies are expected to expand this year and the next, although uncertainty over the global recovery threatens to derail growth, Moody's Analytics said today.

The report underlined the need for Asia's policymakers to maintain balance between inflation and growth. "China will lead (growth in Asia this year), expanding around 10 per cent followed by India and Vietnam at around 8.5 per cent," Moody's said, adding South Korea is expected to grow around 6 per cent, despite the deteriorating relationship with its northern neighbour.

The report further said the Asean economies (except Thailand) are expected to grow solidly this year, following impressive first quarter results. On Japan, it said the world's second largest economy will continue to lag, but even it has recorded better than expected growth in recent quarters, "suggesting an upgrade to the full-year forecast could be forthcoming."

Moody's said overall the economic rebound in Asia is going to plan so far and most Asian economies are expected to grow in 2010 and 2011. But, it underlined that "the sovereign default fears and uncertainty regarding the global recovery threaten to derail growth."

On the positive side, it said Asian countries' budget deficits and debt are modest compared to some EU nations and pose few dangers to the longer-term sustainability of government finances. "Hence, the immediate risk of a contagion to Asia’s sovereign debt instruments is relatively small."

But, Moody's cautioned against inflationary pressures that may lead to interest rate hikes in Asia. "Inflation is re-emerging; the time frame may have been pushed out somewhat, but interest rate increases are still expected in coming months," it said, adding the policymakers will need to walk a fine line between constraining inflation and still-fragile sentiment.

Moody's also cautioned against domestic troubles that are clouding the outlook for some individual economies in the region. Thailand’s first quarter growth was impressive, but recent unrest suggests momentum is all but lost. It said the chances of Thailand's GDP growing above 4 per cent this year are rapidly diminishing. On Australia, it said, the government appears to be making "a meal of its tax reform agenda, angering its resources industry with a proposal for higher taxes on mining profits".