Economists polled by Reuters forecast the economy grew by a seasonally adjusted 0.4 percent in July to September, twice as fast as in the previous three months, although weaker than the first quarter's two-year-high rate of 3.0 percent.

On an annual basis, the economy may have expanded 5.4 percent in the third quarter From a year earlier, weaker than the second quarter's revised 6.0 percent climb, but still one of the fastest growth rates in the world.

While Southeast Asia has not been totally immune to the global downturn -- slowing exports are weighing on industrial production -- strong private and public spending is driving robust growth in most of its economies, making the region a magnet for foreign investors.

"It's been a decent year in spite of it all," said Tim Condon, regional economist at ING Bank in Singapore.

"In most of the region and the world, most of the (growth) forecasts have been downgraded. Some parts of Southeast Asia have had their forecasts upgraded, which reflects that people have seen their prospects get better and brighter over the course of 2012," he said.

Confident Consumers

Consumer confidence in Indonesia was at its highest this year in October, helping push car sales up nearly 24 percent, while the Philippines posted its second best reading in September since the index was introduced in 2007.

Malaysia and Indonesia grew an annual 5.2 percent and 6.2 percent in the third quarter, respectively, although tiny, much more export-dependent Singapore contracted.

Thailand grew 1.2 percent in the third quarter from the previous three months and 3.0 percent from a year earlier as factories returned to normal after last year's heavy floods.

With more foreign funds flowing into the region, stock markets in Indonesia and the Philippines both closed at record highs. Manila's key share index has surged nearly 28 percent so far this year, outperforming the Thomson Reuters Southeast Asia Index, which has gained 21 percent. Thai shares are up more than 26 percent and Jakarta around 14 percent.

Southeast Asian government bonds have also been in hot demand for investors seeking higher yields. Manila's recent sale of global peso notes attracted orders approaching $6 billion, nearly eight times the size of the offer.

But inflows have been a two-edged sword, pushing currencies higher against the U.S. dollar and further undermining the attractiveness of the region's exports. The Philippine peso

has appreciated more than 7 percent so far this year, making it emerging Asia's best performing currency and complicating policy decisions for its central bank.

Another Challenging Year

The Philippines, once known as "the sick man of Asia", is the only economy in the world which the International Monetary Fund (IMF) believes will grow faster than anticipated this year.

The IMF earlier this month raised its 2012 growth outlook for the country to more than 5 percent from its October forecast of 4.8 percent, citing sound fiscal and monetary policies.

But analysts have mixed views on how much of that momentum can be carried into 2013, noting much depends on how long the euro zone's fiscal and economic mess drags on, and whether recoveries in the United States and China gather pace.

The progress of structural reforms in countries such as Indonesia and the Philippines could also determine their growth trajectories, while some analysts see the risk of a sharp drop in public spending in Malaysia after national elections that must be called by April.

"Next year it will still be resilient as a whole, but we need to be mindful of more divergence in terms of the growth outlook within ASEAN," said Euben Paracuelles, am economist at Nomura in Singapore.

Paracuelles said Indonesia's 2014 presidential elections may distract efforts at reforms, particularly in infrastructure spending, while more investments are likely to pour into the Philippines as it steps up implementation of public-private partnership schemes in major infrastructure projects.

ING's Condon said the Philippines has to raise its investment-to-GDP ratio from 20 percent, and match Indonesia's investments of at least 25 percent of GDP, to push growth to 7 percent or higher.

If regional and global growth does pick up, higher inflation may also start to kick in towards the second half of 2013, which may put pressure on central banks of the Philippines, Malaysia, and Indonesia to hike interest rates, Paracuelles said. But Condon said there were no major demand pressures and rates could remain steady next year in most of the region after central banks eased policy this year. (Reuters)