From the U.S. to Europe to China and emerging markets, 2014 will prove a year of "tricky transitions," Morgan Stanley's Joachim Fels in a new free newsletter.

"Looking at the broader picture, 2014 will mark year five of a post-crisis global economic expansion that has seen bumpy, below-par and brittle growth," Fels writes.

The first four years of the post-crisis paradigm has been characterized by deleveraging in developed markets, leveraging in emerging ones, expanding central bank balance sheets, and a "full-blown debt crisis in Europe."

"If all goes well, 2014 could mark the transition to a sounder, safer and more sustainable second half of this expansion," Fels writes. "That means a DM expansion that is less dependent on monetary and fiscal stimulus, instead driven by private consumption and capital expenditures and supported by a normalization of the credit mechanism. It also means an EM expansion that is helped by structural reforms aimed at more sustainable growth models."

But it won't be easy.

1. The Fed has to manage tapering

"The Fed, under the new leadership of Janet Yellen, still has to manage the tapering process and create credible forward guidance on interest rates to avoid a replay of the unpleasant experience last summer, when the markets almost completely disregarded the Fed’s “tapering isn’t tightening” talk and pushed market rates significantly higher."

Source: Morgan Stanley

2. It will be a 'crunch year' for Japan and Abenomics

"This year will be difficult for Japanese GDP growth as the planned corporate tax cuts are unlikely to fully offset the drag from the consumption tax hike in April. Also, our Japan team does not expect to see major progress on structural reforms that could boost growth in the short term. Still, we expect the economy to muddle through. We forecast additional easing measures by the Bank of Japan in the course of the year in the form of increases in the amount of asset purchases, as well as the potential introduction of US-style forward guidance. Over time, this should support the transition from deflation to moderately positive inflation."

Source: Morgan Stanley

3. Europe will attempt to cleanse the banking system

"The Euro Zone is facing a crucial transition in 2014, where we see below- consensus GDP growth of only 0.5%. The comprehensive balance sheet assessment, planned ahead of the ECB taking over as single supervisor in the fourth quarter, will combine an asset quality review (AQR) and a bank stress test. This process will likely unify and cleanse the banking system, reduce fragmentation and unclog the lending channel—preconditions for a more sustainable recovery and for allaying what we view as a major risk: “Japanification” and deflation."

Source: Morgan Stanley

4. China will have to transition to reform-driven growth

"China will have to transition from growth driven by leverage and state- owned enterprises to reform-driven growth. Financial liberalization and easing of personal and social freedom can improve the quality of resource allocation beyond what rebalancing to consumption- led growth could accomplish. However, the near-term task of implementing reforms is far more challenging, thanks to China’s starting point of financial market prices that don’t reflect fundamentals, capital misallocation and deleveraging."

Source: Morgan Stanley

See the rest of the story at Business Insider

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