The United Nations dubbed the Tsunami that hit the coastal regions of South and Southeast Asia on Dec. 26 the worst natural disaster ever. It killed thousands, injured countless others, and caused billions of dollars in damage. Its overall economic impact, however, is likely to be minimal, as the economies of Asia are in the best shape they've been in since 1997.

Incomes have been rising fast throughout Asia for the past two years, and this is visible in a number of ways. Prices for real estate in Hong Kong are exceeding levels last seen in 1997. A surge in private car ownership is causing awful traffic jams in all major Asian cities, including those in China, where farsighted municipal officials had enthusiastically built new roads and bridges over the past decade. Airlines are increasing the frequency of regional flights and ordering airplanes to handle growing numbers of passengers.

Statistics reflect that the economies are on the upswing. In most Asian countries, gross domestic product growth beat the year-ago forecast. At that time, the Asian Development Bank (ADB) expected the GDP of China to grow by 7.9% in 2004, Japan by 1.8%, and India by 6.3%. Now, the organization estimates that China's 2004 GDP grew by 9.3%, Japan's by 4.0%, and India's by 7.4%. GDP growth in Hong Kong, Singapore, and Taiwan also exceeded forecasts by wide margins.

Numerous factors contributed to the good results. A key factor was that, until the tsunami, 2004 had been relatively disaster-free. Thailand suffered an outbreak of bird flu early in the year, but it did not turn into a pandemic. Tensions remained high in the Taiwan Strait and on the border between North and South Korea, but hostilities did not break out. And in the hot spot of Kashmir, catastrophe has become less probable as more amicable relations develop between Pakistan and India.

For more than a year, two major worries for business planners in Asia have been the effect of high oil prices and whether the Chinese economy is entering a downturn. Benchmark Texas sweet crude has exceeded $30 per barrel for all of 2004 and briefly peaked at $55 in October. In a December report, ADB put forward four reasons to explain why record oil prices have not harmed Asian economies.

In inflation-adjusted terms, ADB pointed out, oil prices have remained at half the peak that they reached in the oil shock of 1979–80. Second, Asian economies have become more energy efficient. Third, the surge in oil prices was largely the result of the strength of demand, which itself is a sign of economic vigor. And fourth, Asian economies have built up large reserves of foreign currencies that enable them to continue importing expensive oil.

A DOWNTURN in the Chinese economy would have a profound impact on Asia and the rest of the world. In recent years, hordes of Chinese tourists have started to roam the globe, boosting tourism worldwide. China has turned into a major importer of luxury cars, construction machinery, aircraft, flat-screen displays, soybeans, and U.S. beef. It is the world's biggest importer of polyolefins and a major importer of advanced specialty chemicals.

China grew too fast in 2003 and in the first half of 2004, and this caused shortages of electricity and soaring prices for commodities such as steel and coal, as well as basic chemicals like benzene. Early in 2004, the central government in Beijing became worried at what it saw as a wave of overinvestment in ill-conceived projects. Through administrative measures, such as refusing to approve new projects and strictly applying zoning laws, authorities acted to cool down the economy.

Naysayers claimed the measures could not work, but they did. The most unlikely investment projects were halted, growth stopped accelerating, and companies took it in stride. "Following the initial disruption from these measures, companies appear to have found ways to moderate the impact of the administrative actions, and output growth has recovered sharply," the Organization for Economic Cooperation & Development (OECD) commented in its world economic outlook, published in November.

China's economy has also been affected by high oil prices. But, according to OECD, the impact is minimal because a fortunate set of circumstances is fueling growth in China. The residential construction boom that is now under way will continue because interest rates are lower than inflation. And although administrative measures have interfered with the supply of new houses, incomes have continued to grow fast, keeping demand strong.

Rural incomes are growing at their fastest rate in seven years, OECD noted. Exports are growing, largely because of increased investment by foreign companies trying to lower their operating costs. Furthermore, OECD pointed out that the protectionist Multifiber Agreement that has shielded the textile industries of developed countries from low-cost competitors will lapse this year, to the benefit of China.

China Petroleum & Chemical Corp. (Sinopec) is benefiting from the boom. The conglomerate, an oil refiner that derives 20% of its income from petrochemicals, saw its net income rise 79% in the first nine months of the year compared with a year ago. Flush with cash, Sinopec and its subsidiaries are considering various investment projects. Zhenhai Refining & Chemical will invest $2.15 billion in a wholly owned world-scale petrochemical complex in Zhejiang. And Sinopec announced in late December that it would spend $445 million to purchase the public's shares in its separately listed subsidiary Beijing Yanhua Petrochemical.

CHINA MAY be increasingly viewed as Asia's growth engine, but Japan's economy remains five times larger. As a result, modest economic growth in Japan has an impact on the region similar to that of high growth in China. After a slump of more than 10 years, the Japanese economy appears to have turned the corner. OECD noted in its November report that Japan is enjoying its fastest expansion since the 1980s. OECD said export growth is slower than it was in early 2004, but that demand is now driven by a shrinking unemployment rate and higher corporate profits. For the next two years, it expects growth in Japan to continue, albeit at a slower rate than last year.

OECD's assessment of the Japanese economy was confirmed last month by the Bank of Japan's quarterly "tankan" survey, which showed that Japanese managers are cautiously optimistic about economic conditions. In the latest tankan, 10,227 companies were asked about their assessment of economic conditions. The survey estimated that, overall, large Japanese companies are raising capital spending 7.7% in the fiscal year ending March 31. The December survey reported that business confidence was slightly lower than in September, but that confidence then had been at its highest in the past 10 years.

Likewise, large Japanese chemical companies are on track to enjoy their strongest results in 10 years. Asahi Kasei, a company that depends on Japan's economy for much of its sales, expects that its net profit in the current fiscal year will be more than 100% higher than in the year before. Nearly a third of Asahi's business consists of building residential homes, and housing starts in Japan are no longer on the decline. Mitsui Chemicals, which also does most of its business in Japan, expects a more modest 20% improvement, as its performance is dragged down by exceptional losses.

Shin-Etsu Chemical expects its net profit up to March 31 to grow a comparatively modest 20%. But Shin-Etsu differs from other major Japanese chemical makers. It has declared record profits every year for more than 10 years even as its peers were reporting losses. The rarely erring Japanese firm issued a resounding vote of confidence in market conditions and in its own capabilities by deciding in December to invest $2 billion in a polyvinyl chloride complex in the U.S. and in 12-inch silicon wafer expansions in Japan and the U.S. Shin-Etsu, the world's leading producer of both silicon wafers and PVC, said market growth warrants the expansions.

In India, Reliance Industries, the giant refiner and petrochemical producer, is also performing strongly. Its net income in the first half of the fiscal year was 35% higher than a year ago. The company said the improvement was mostly due to its exploration and refining businesses. Demand for petrochemicals was flat, it said, because Indian manufacturers had built up an inventory of polymers and synthetic fibers and have been winding the inventory down.

The performance of Indian pharmaceutical producers was less impressive. Net profit at Ranbaxy dropped 30% in the first nine months of the current fiscal year. The drop has not shaken the firm's belief in its bright prospects as an emerging global pharmaceutical player, however. It attributes the slip to an increase in salaries as it hires more workers globally and boosts its R&D capabilities. Similarly, Dr. Reddy's explained that its net income in the first half dropped 45% mostly because it had higher marketing expenses and manpower costs.

UNLIKE MOST other Asian countries, South Korea performed more poorly than forecast. A year ago, ADB expected GDP growth in 2004 to reach 5.2%, but it has since lowered the prediction to 4.8%. South Korea's slightly less buoyant economic conditions are primarily the result of weak domestic consumption, following a period when South Koreans overborrowed and spent beyond their means. South Korea's export performance remains strong, and leading chemical maker LG Chem experienced a 49% improvement in its net profit in the first nine months of the fiscal year.

ADB and OECD made their 2005 growth projections for Asia before the Dec. 26 tsunami. Shortly following the disaster, ADB said it would take time to get a clear idea of the toll of the disaster. But stock markets in India and Hong Kong rose in the days following the tragedy. The currencies of Thailand and Indonesia, two countries severely affected by the giant waves, barely moved.

Though damaging to coastal regions, the tsunami of Dec. 26 is unlikely to harm the economies of Asia in 2005. The major uncertainties for the coming year are surprisingly similar to what they were a year ago: a flu pandemic, a rapid deterioration in U.S. economic conditions or a full-fledged dollar crisis, an outbreak of hostilities between longtime regional rivals, and a much sharper increase in oil prices. If none of these events comes to pass, 2005 will likely be another excellent year for business for the region.