Resurgence of inflation unlikely - Global Focus

"Strong policy measures in the form of monetary and fiscal stimuli could save the US economy from suffering a Japan-style prolonged downturn", states the latest edition of Standard Chartered's Global Focus monthly.

Fears about sovereign debt defaults were overblown, and a resurgence of inflation is unlikely, the report said, adding that although the risk of a double-dip recession is genuine, it is not the Bank's base case scenario yet.

The report forecasts the US Federal Reserve will reactivate quantitative easing later this year, buying government and other debt securities from financial institutions, to increase the supply of money in the economy.

These measures, it expects, will help keep US GDP growth at 1 percent in 2011 and avert a technical recession. two quarter-on-quarter economic contractions in a row.

An economic slowdown is inevitable in the second half of 2010 as fiscal stimulus wears off, especially in the developed countries of the West. However, the report argues that this will be balanced by an improving outlook in 2011, driven by emerging markets, especially Asia, where strong fundamentals are expected to support domestic demand.

Investors are already positioning for the economic slowdown by rebalancing their investment portfolios towards emerging market bonds.

This major asset-reallocation by global investors is favouring South East Asian currencies and African currencies such as the South African Rand which are sensitive to overseas inflows into bond markets. "