Southeast Asia's GDP growth is almost back on stream after an uncertain 2008 and 2009. First-half GDP growth has been better than most expected. Singapore posted a spectacular 18.1 per cent year- on-year (y/y) growth in the first half of 2010, while Indonesia accelerated at 6 per cent and Malaysia at 9.5 per cent over the same period. The recovery was mainly driven by resurgent exports in the manufacturing sector and increase in domestic demand. The resulting increase in manufacturing output led to firming up of labour markets and higher wages, which in turn supported higher private consumption.

Capital inflows have also rapidly returned to the region. This is in terms of both direct investment and portfolio flows. Vietnam posted higher foreign direct investment (FDI) disbursement in the first half of 2010 to US$5.4 billion, up nearly 6 per cent over the same period last year. Despite unsettled political affairs in Thailand, the number of foreign investment projects during January–March 2010 soared by 30.5 per cent to 184 from 141 in the same quarter the year before.

Foreign portfolio investment has also surged, especially into Indonesia and Thailand, driven by profitable trades in the equity and fixed income markets.

The stock market rallied on the improved economic outlook and revival in capital inflows (Figure 1). The Singapore stock exchange jumped 15 per cent by October from the beginning of 2010. Indonesia's stock market, Jakarta Composite Index, swelled more than 39 per cent since January 2010. The surge in capital inflows caused exchange rates to appreciate strongly.