In their forecast for the year ahead, economists and analysts at Citigroup Inc. are calling for the United States and Asia to lead the recovery, while Europe and Japan lag. Longer term, emerging Asian economies are expected to lead the world.

A new report form Citi’s Investment Research and Analysis group says that the initial bounce in output is expected to be quite solid and even across major economies through early 2010, but that after this initial burst, Citi expects sustained momentum in Asia (excluding Japan), and a fairly strong recovery in the U.S., with more gradual, medium-term recovery in Europe and Japan.

Asia will lead the world, powered by China, it forecasts. “After having an earlier and sharper rebound than the rest of the world, aided by inventory-restocking, aggressive policy stimulus, plus strong investment and consumer spending in China, we expect the region’s recovery will continue to gain momentum in 2010,” it says.

The firm foresees continued low interest rates in most countries through 2010. “The global economic recovery already has prompted interest rate hikes in a few countries, but our forecasts do not anticipate an early or aggressive turn by the main central banks,” it says, adding that inflation is expected to remain subdued thanks to the ample spare capacity that persists in most major industrial countries.

The firm predicts that credit availability will likely be constrained for a long period, probably a year or two, rather than a quarter or two, “as banks retrench and, under regulatory pressure, seek to raise extra capital.” And this will also limit the recovery, it notes.

Michael Saunders, Citi’s global head of developed markets economics, said, “After the most severe global recession for decades, we now expect a sustained but uneven global recovery. Almost all major economies exited recession in Q2 and Q3, and we again make more growth forecast upgrades than downgrades. This month, we are upgrading our 2010 GDP forecasts for the U.S., Japan, U.K., Australia, New Zealand, Hong Kong, Korea, Argentina, Hungary, Poland, Czech Republic and Turkey.”

Looking further out, Citi says that the resolution of unsustainable fiscal trends will be a major influence on economic prospects in 2010 and beyond. “Global economies need central banks and governments to successfully manage the exit strategies from extreme monetary accommodation, without creating further instabilities and denting future growth prospects,” Saunders says.

Moreover, it suggets that the rankings of global economies will change markedly in the next five to 15 years, “we envisage a virtuous circle of rapid industrialisation and buoyant domestic demand in Asia, supporting growth in resource-rich regions (Africa, Latin America, Middle East, Russia and Brazil),” Saunders notes.

As emerging markets industrialize, they are expected to power world economic growth, with the spending of their emerging middle classes becoming “a major new engine for global growth, filling the gap as consumer spending in the U.S., U.K. and other industrial countries moderates.”

This shift in the balance of economic power shifts may, in turn, lead to a shift in thinking about the appropriate model for economic growth and financial markets, it says. Citi economists argue, “China and India, for example have more closed capital accounts and financial systems than many emerging economies and far more closed than the developed world — arguably, this is one of the factors that allowed these countries to escape crisis in the 1990s and to survive the recent crisis relatively well.”

IE