The darkest days are gone. After a long, hard winter, the region’s
economies are once again showing signs of life. And it’s more than
just green shoots here and there. This is a lasting rebound, in our
view, driven by a powerful stimulus for sure, but sustainable well into
next year. Risks remain, of course, including a dreaded perk-up in
inflation and growing trade and fiscal imbalances. But the region, led
by both China and India, should brave the course and finally pull
through. Loose monetary policy is the key to Asia’s rebound.

Not dippin’
It almost appears too good to be true. Only nine short months ago, the region, and the world economy
along with it, stood near the abyss. But, after peering into a dark hole, markets turned and started to rally.
Financial optimism had its source in improving macroeconomic data. Especially in Asia, the news turned
out far better than many had dared to hope only a brief while before. To be sure, expectations were so low
that it took only a little nudging to fire up markets. Alas, most data looks far prettier when viewed
sequentially, since annual numbers in most cases remain rather discouraging. This, then, is not the end of
the journey, and a lot of work still needs to be done. But, at last, we have stepped back from the brink.
Reading the news along with everyone else, policy-makers swiftly responded and rolled out the world’s
most powerful stimulus. Across Asia, bridges are being built hard and fast, and various policies aim to
sustain demand. The region, in fact, boasts a fiscal stimulus nearly twice as large as in other parts of the
world. And the money goes further: with no cash being diverted to clean up ailing banks, all the funds go
straight to healing demand. Still, there are lingering doubts: what happens when the fiscal stimulus fades?
Will Asia sustain its rebound even as the West continues to sputter? Without the export engine firing up
again, is there enough juice left to fuel the region’s economies for the next couple of years?
We think so. But the key, it needs to be noted, is a vast monetary stimulus. As we noted elsewhere, and
again in these pages, the region’s financial systems were left largely unharmed by the calamities
engulfing the West. After interest rates were chopped to record low, abundant liquidity now floating
around Asia is gradually starting its quiet work. Already, asset prices are rising and consumption is
coming back. To be sure, the process is most notable in China. But others are following, too: Singapore,
Hong Kong, Taiwan, Korea, and Indonesia are feeling buoyant as well. India, too, has nudged out growth
far stronger than many had believed, and a decisive election boosted hopes for more to come.
This, then, is the view this summer. It looks as if the region will be pulling through. Still, whispers about
another dip continue to echo across trading floors. This is understandable: the restocking story will

eventually run its course, and what the export sector requires thereafter is genuine demand growth in the
West, not simply empty warehouses that need to be refilled. Here, the outlook is a little worrying. Our
colleagues in the US and in Europe expect growth of only 1.9% and 0.1%, respectively. Hardly the stuff
to bring us back to Asian trend growth. But, even if the region may not immediately return to the heady
days of pre-crisis growth, there remains sufficient scope for domestic demand to fill the void of weaker
exports, at least for a while. The trouble is this: views about Asia dwell in the extremes. Either the region
is seen as entirely dependent on exports, or as entirely decoupled. In reality, it is neither. Slow exports
will dampen growth, but this will prevent policy-makers from tightening the screws, allowing domestic
demand to push growth to at least decent levels.
No straight line
Our confidence in Asia’s resilience isn’t blind. Risks abound, and possibly in quarters least expected. The
biggest worry, for us, is that inflation may again perk up. This, to be sure, is more of a headline story, and
does not necessarily relate to core measures. But base effects alone will swiftly push up readings by the
end of the year. This matters for financial markets: as expectations of central bank policy swerve from
one extreme to another, a sudden inflation spike may only add to the volatility. Still, we do not think
policy-makers will wish to respond aggressively, maintaining a path of cautious tightening next year,
mindful of the fragile recovery and the required reflation of assets to sustain Asia’s recovery.
What do we like? The three that still stand out are China, India, and Indonesia. The latter in particular has
proved quite resilient and, with politics out of the way, the economy should steer a robust path. But there
are other economies worth watching: the biggest rebound should occur in Singapore and Malaysia, where
already signs of stabilisation are evident and where the fiscal stimulus is among the greatest. Vietnam and
Sri Lanka, too, are among our top picks, with the latter likely to reap a peace dividend in the coming years.
Perhaps a little surprising to some, we also pencil in a handsome rebound in Thailand, judging that politics
will at last stabilise and that the economy will emerge from years languishing in the doldrums. Elsewhere,
caution lingers: in Korea and Taiwan, the recovery should prove more muted as, in either case, domestic
demand may not offset the blow from exports.

What happened 4
Where it’s going 5
Key forecasts 6
Monetary & fiscal policy
assumptions 7
Asia’s three-stage recovery 8
And so it begins 8
Reasons for scepticism? 9
Sustainable recovery? 10
Conclusion 15
Inflation re-ignited? 16
The next big shock? 16
The other side 18
The gap’s here 20
We’re all in it 21
What it all means 22
In a nutshell 24
What’s in focus 24
Target practice 26
Where’s the growth? 27
GDP 30
Inflation 31
Industrial production &
unemployment 32
Consumption & saving 33
Investment 34
Trade 35
Exchange rates & interest
rates 36
Country profiles 37
China 38
Hong Kong SAR 40
India 42
Indonesia 44
Japan 46
Korea 48
Malaysia 50
Pakistan 52
Philippines 54
Singapore 56
Sri Lanka 58
Taiwan 60
Thailand 62
Vietnam 64
Disclosure appendix 66
Disclaimer 67
Contents