Asia Still Set for Robust Growth

As the global financial downturn drags on, some investors have started to question the pre-recession storyline of robust BRIC growth. Analysts like Morgan Stanley's Ruchir Sharma are predicting that inflation will throw cold water on emerging-market recoveries; others, such as emerging-market fund manager Mark Mobius, claim that cracks within the BRICs will soon develop. Mobius recently declared, for instance, that Brazil's economy will be "more sustainable" than China's because of resource self-sufficiency.

But a new study from Capital Economics suggests that, despite these hurdles, it's still going to be an Asian century. While the U.S. and Europe are expected to slog through a meager 3 percent and 1.5 percent GDP growth this year, respectively, emerging Asia's GDP is set to surge 8 percent on average in 2010 and 6 percent in 2011. Not surprisingly, the rebound will be led by China--slated to grow 10 percent in 2010--followed closely by India (8.5 percent), Taiwan (7 percent), and Vietnam (7.5 percent).

The study's authors point to rising domestic demand as the engine fueling Asia's recovery. Throughout the slump, household spending has held up well in China, thanks to tax breaks and Cash for Clunkers-type schemes, and rapidly expanding private consumption in Southeast Asian nations such as Thailand and Malaysia has helped boomerang them out of the crisis. In Asia's other big economies, India and Indonesia, consumer confidence has returned to pre-recession levels, and retail sales growth remains strong thanks to rising incomes, low personal debt, and high household savings.

Of course, there are caveats. The big risks for Asia are an expected downturn in trade over the course of the year as foreign demand flags (which could hurt ­export-­dependent China and South ­Korea) and overheated asset bubbles caused by easy credit sloshing through the markets. There's also some question as to whether countries where consumer debt remains high--­South Korea, ­Australia--will be able to sustain domestic consumption. And if food or oil prices skyrocket to 2008 levels because of rising inflation (as some analysts now forecast), it would seriously wound household spending abilities across the region. Finally, if governments pull back stimulus measures too quickly, consumers may not be poised to pick up the slack yet--­particularly in China.

Still, many of Asia's governments are already moving to contain inflation and rein in lending. And, as the study notes, government debt levels are more manageable than in the West, and banking systems are in better shape. Which all means that it's Asia's century to lose.