Viewpoint: A year of transition, uncertainty and change
In the Chinese Zodiac, 2012 is the Year of the Water Dragon - marking a year of transition, uncertainty and change.
The Asia-Pacific economies certainly face considerable uncertainty as well as headwinds in 2012, with the eurozone already sliding into recession at the end of 2011, while the momentum of US economic recovery - although encouraging in recent months - remains moderate at best.
The Year of the Dragon will also be a year characterised by political uncertainty, with presidential elections in the US and France, as well as leadership change in China.
In autumn 2012, the 18th National Congress of the Communist Party of China will elect the new Central Committee and Politburo Standing Committee members.
The current President Hu Jintao and Premier Wen Jiabao are due to step down from the Standing Committee to make way for the next generation of leaders from whom the new Chinese president and premier will be appointed in March 2013.
Despite the political and economic uncertainties facing the global economy, the Asia-Pacific (Apac) is forecast to continue to be the fastest growing region of the world economy in 2012, with growth rising to 5.3% from 4.5% in 2011.
This forecast is based on the IHS Global Insight central case scenario that the eurozone experiences only a mild recession in 2012, with gross domestic product (GDP) declining by 0.7%, while moderate positive growth continues in the US, at a pace of 2.0%.
Three key factors underpin the resilience of Apac economic growth.
First, as I mentioned, the continued US economic recovery in 2012. Second, China - the world's second-largest economy - is expected to have a soft landing in 2012, with growth moderating to 7.8%, rather than a major slowdown that some fear.
Domestic demand is expected to underpin economic growth momentum, with latest economic data showing retail sales up 17.3% in November on a year ago, and fixed asset investment in November up 21.2% year-on-year.
The Chinese government has also embarked on a programme to build 36 million housing units for low-income households over 2011-2015, with construction of the first 10 million of these units having commenced in 2011.
Continued growth in Chinese demand for exports from the rest of Asia will help to mitigate the impact of weaker export demand from the recession-hit eurozone.
Third, the Japanese economy is expected to achieve a moderate rebound in 2012, due to the normalisation of industrial production and the impact of fiscal stimulus, as post-disaster reconstruction steps up.
Japanese industrial production is forecast to grow by 9.5% in 2012, after a 2.8% decline in 2011. This Japanese growth rebound provides a third important mitigating factor to the impact of the eurozone recession.
Despite the resilience of the Apac economies, the more export-dependent East Asian economies - such as Singapore, Malaysia and Hong Kong - are expected to experience some moderation in economic growth due to weaker eurozone demand.
India is also experiencing softening growth momentum due to the impact of 13 interest rate hikes since March 2010, as the Reserve Bank of India grapples with persistent inflationary pressures.
However, elsewhere in Apac, inflationary pressures are abating, with China, Malaysia, Indonesia and Vietnam among the countries that have seen headline inflation edging lower in recent months.
The outlook for 2012 is, for most emerging Asian central banks, to pursue more accommodative monetary policy stances - albeit cautiously - as inflationary pressures abate, providing some further support for economic growth.
The greatest risk to the Apac outlook continues to come from the eurozone.
Should efforts by the eurozone governments to stabilise the economy fail, the region could enter an escalating economic crisis.
Any such development has the potential to trigger a global recession with severe negative shocks transmitted to Asian economies through declining world trade, a deepening global credit crunch and the risk aversion triggering capital flight from emerging markets.
The second key risk to the Apac region would be if the Chinese economy experiences a hard landing, with GDP growth declining below 5%.
While the probability of the China hard landing scenario is still low, at around 25%, nevertheless imbalances and vulnerabilities in the Chinese economy have increased over the past two years.
A key vulnerability comes from the 50% expansion in bank credit in 2009-2010 and the accompanying rapid growth in local government borrowing, which is expected to result in significant increases in Chinese banking sector non-performing loans over the medium term.
Therefore, although the Apac economic outlook is for a resilient economic performance in 2012, risks and uncertainties abound in the Year of the Dragon.