By Anoop Singh

The prospects for the global economy have brightened somewhat since the dawn of 2012.

After a sharp slowdown in the latter part of 2011, global activity is showing signs of renewed strength.

Financial conditions have eased considerably and risk appetite rebounded in recent months after policy actions helped contain the prospects of an imminent crisis in the euro area.

Growth in Asia is also expected to gain strength over the course of 2012.

Although activity slowed markedly across the region in the last quarter of 2011, mainly due to weakening external demand, domestic demand has generally remained strong, as reflected in low unemployment, high capacity utilisation, and robust credit growth.

In the first months of 2012, leading indicators of activity strengthened and capital inflows into Emerging Asia rebounded.

The latest International Monetary Fund's (IMF) Economic Outlook for Asia and the Pacific (REO, April 2012) projects growth for the Asia and Pacific region as a whole at 6 per cent in 2012, broadly unchanged from last year, before rising to about 6.5 per cent in 2013.

However, the global economy remains fragile, exposing Asia to significant downside risks.

The debt crisis in the euro area has not been fully resolved, and financial turmoil could still escalate there and spread globally.

In addition, increased geopolitical risks could push energy prices sharply higher.

So far, stronger economic and policy fundamentals have helped buffer Asian economies against the global financial crisis, including by limiting adverse financial market spillovers and ameliorating the impact of de-leveraging by European banks.

But a sharp fall in exports to advanced economies and a reversal of foreign capital flows would severely impact activity in Asia, both directly and through knock-on effects on domestic demand.

Moreover, a shock to commodity prices could create difficult trade-offs between inflationary pressures and the still feeble recovery.

There are, on the other hand, some upside risks to Asia's outlook. Further stabilisation of global economic and financial conditions over the course of 2012 could boost growth.

However, macroeconomic policy has remained generally accommodative, and a growth revival could re-ignite overheating pressures in the region.

Against this background, Asian policymakers face the difficult task of calibrating the amount of policy accommodation needed to support stable, non-inflationary growth.

At the same time, Asian countries, like many others around the world, are attempting to make growth more inclusive.