Hong Kong's recovery will lag the rest of the region because of its vulnerability to volatile US interest rate movements through the linked exchange rate, according to economists. 'The outlook of this interest rate environment for Hong Kong relative to anywhere else in Asia looks particularly problematic,' said Salomon Smith Barney head of Asia-Pacific economic & market analysis Donald Hanna. Headline forecasts for gross domestic product growth are relatively strong but economists warn that much of the figure is due to the relatively low level of last year's base figures. Credit Lyonnais Securities (Asia) forecasts the economy will grow 7.5 per cent this year but the majority of that is a technical bounce from the low levels of GDP in the early part of last year. 'Hong Kong can't fail to grow by 4 per cent,' CLSA chief economist Jim Walker said. Once the low base factor is removed next year, headline growth is forecast to fall to 3.5 per cent, according to CLSA. The investment house forecasts Asian growth will average 5.6 per cent this year and 4.1 per cent next year. CLSA also expects the US economy to enter a recession due to increases in interest rates to contain inflation. 'When the slowdown comes [in the US] we expect it to come very hard,' Mr Walker said. Mr Hanna believes the US economy is in for a soft landing as the Federal Reserve's interest rate increases will prevent inflation. 'There is no hard landing coming,' Mr Hanna said. Despite not expecting a hard landing in the US, Salomon Smith Barney forecasts the Hong Kong economy will grow 5.5 per cent this year due to the effects of higher interest rates. Asian equity markets will outperform the US but it is uncertain how strong they will be in absolute terms. 'I wouldn't like to say Asian markets will be higher but they will outperform the US,' Mr Walker said. Regional equity markets will be helped by companies seeking to increase their return to equity as raising finances through the banking system becomes more difficult with domestic credit drying up. 'Corporations are going to become more focused on return to equity,' Mr Walker said. Asian economies are at the 'sweet spot' of the business cycle and have four to five more years of cyclical upturn, according to Mr Walker. South Korea and Taiwan are best protected from the slowdown in the US as their exports are dominated in the technology sector which is less affected by cyclical downturns than the exports from countries such as the mainland. Inflation is expected to remain low in Asia as there is still much spare capacity in the economies. 'The inflationary pressures we expect going forward are very minimal,' Mr Hanna said. Asia's current-account surpluses are expected to continue although Mr Walker warned they could deteriorate as the US economy slows.