Volatile markets ahead

With the new year, the focus has turned to the performance of the global economy. Analysts, strategists and economic pundits are guessing that the months ahead will be characterised by divergent performances within developed and emerging economies, and not just between the two groups.

They expect growth in Europe to diverge from other developed economies, which should be stronger than last year. Bank of Singapore says Europe will be plagued by currency volatility for most of the year.

The Singapore-based bank says it believes the emerging-market economies will grow at 5.5 per cent compared with 1.9 per cent in developed economies and just 0.2 per cent in the euro zone.

Asia is expected to grow by 7 per cent this year, but the key theme will be divergence of growth within the continent and the emerging markets generally. Inflation risks are still present in Asia, analysts warn. Given that Asia is greatly affected by the economic concerns of its Western counterparts, things can go wrong quickly and with little warning.

'Against a backdrop of solid United States recovery and instability in Europe, we see resilient trade and production growth in Asia primarily driven by stronger exports to other emerging market countries,' says Richard Jerram, chief economist at the Bank of Singapore. 'However, economic prospects within the emerging markets themselves will begin to meaningfully diverge in the first half of 2012, depending on the strength of its domestic growth and the competence of inflation management in the individual markets.'

Most strategists and economists believe the mainland's economy is heading towards a soft landing, having introduced relevant credit-control measures to cool growth and manage inflation. Recent figures from the mainland's central bank show inflation is well under control at 4.1 per cent.

Bank of Singapore expects growth in economies, such as Indonesia, to remain strong but with inherent inflation risks. It is less positive about India and Vietnam and expects both countries to face potentially hard landings as a result of low growth and high inflation.