A year ago Asia stood on the brink of a depression. This week it is on the verge of recovery. With Singapore and South Korea officially stating that their recessions are over, economists are upgrading their 1999 forecasts for the troubled region, devastated since mid-1997 by its worst post-war economic crisis.

Throughout Asia, foreign funds are flowing back in, sending local stock markets back towards their highs of two years ago. Most of it is going to Japan and South Korea, with a slower trickle to countries with less political stability.

South Korea attracted $2 billion (€1.88 billion) in direct investment in the first quarter, while Indonesia enticed only $560 million. Economists in the region warn that, while local conditions are favourable for a continuing rally in Asian stocks, they are subject to fluctuations on Wall Street.

"Now the whole world is running on one engine - the United States, and this engine might not be that strong," said Mr Chua Soon Hock, chief strategist of Sanwa Bank Singapore.

Singapore economists expressed cautious optimism about the future after the first-quarter gross domestic product showed a 1.2 per cent growth, with predictions for the full year for GDP growth varying between zero and 3 per cent. Singapore's Trade and Industry Ministry said its composite leading index, which measures economic activity about three quarters ahead, rose by 8.3 per cent in the first quarter of 1999.

The growth in the three months to March reversed two straight quarters of contraction. The rebound has been led by the manufacturing sector, particularly the electronics and chemicals industries. Yesterday, South Korea announced 4.6 per cent gross domestic product growth in the first quarter of this year from a year earlier, much better than expected, against a 3.6 per cent contraction a year ago. South Korean President Kim Dae-jung said yesterday he was concerned that the country's rapid economic recovery might slow down reforms.

"What I am really concerned (about) is that the pace of economic recovery is too fast and that, because of it, businessmen and people may relax and slow down reforms," Mr Kim said when meeting International Monetary Fund managing director Mr Michel Camdessus.

The outlook for the Philippines is also good, with the prospects of a "moderate but respectable" economic recovery this year, thanks to falling interest rates, said central bank governor Mr Gabriel Singson on Tuesday.

Malaysia's economy is recovering from its first recession in 13 years, according to Malaysia's central bank. Finance Minister Mr Daim Zainuddin said businesses and ordinary Malaysians were showing greater confidence in the government's ability to revive the economy.

"The mood has changed. . . people are even beginning to borrow from the banks," he said.

In Paris this week the Organisation for Economic Co-operation and Development said that Asia's crisis-hit economies appear to be recovering faster than expected, but the process will gather momentum only next year and risks of a setback remain.

"Some Asian crisis countries, notably Korea, appear to have started to recover more rapidly than expected," the OECD said in its global economic outlook.

The report was optimistic about Australia and New Zealand, but said Japan faced an uphill battle.

"In Japan, the outlook remains bleak," it said, adding that there was little room left for macroeconomic policies to boost activity with interest rates at almost zero and a large government debt burden built up by fiscal stimulus packages.

"Although the worst of the recession is thought to be over, no pick-up to speak of is expected," the report said. The dynamic Asian economies of Taiwan, Hong Kong, China, Indonesia, Malaysia, the Philippines, Singapore and Thailand were positioned for a mild rebound, helped by a recovery in world demand for electronics, but recovery was unlikely to become firmly established before 2000.