The document discusses predictions for the global economy in 2014. It notes that central banks around the world have engaged in unprecedented monetary stimulus since the 2009 recession but will begin reversing course in 2014 by tapering quantitative easing programs. This will likely lead to higher global interest rates and a healthy downward adjustment in asset prices. It also predicts a rotation away from vulnerable emerging markets towards selected advanced economies. The global economy may experience a bumpy road as higher interest rates and lower asset prices could weaken global consumption and investment.

1. Weekly Commentary
QNB Economics
economics@qnb.com.qa
December 29, 2013
Where the Global Economy Is Heading in 2014
Economists are famous for making wrong
predictions. In December 2012, most
economists predicted the end of the Euro, a
hard landing of the Chinese economy and
continued strong performance in emerging
markets (EMs). Far from it, confidence in the
Euro was restored this year, Chinese growth
is accelerating again and most EMs are
suffering one of the worst economic crises in
decades. So, how about next year?
According to QNB Group, 2014 will mark the
end of the unprecedented monetary
stimulus central banks around the world
have engaged in since the global recession of
2009. This, in turn, will imply higher global
interest rates, a healthy downward
adjustment in asset prices and a rotation
away from vulnerable EMs in favor of
selected advanced economies. The road for
the global economy is likely to be bumpy in
the process.
Looking back, 2013 was marked by three
significant developments in the global
economy. First, the euro area finally came
out of a long recession and confidence in the
single currency was restored. This has
enabled Ireland to exit the bailout program it
entered in 2010. Ireland and Spain (and to a
lesser extent Greece, Italy and Portugal) are
also seeing the first signs of economic
recovery. This trend is likely to continue in
2014.
Second, much of the worries about a hard
landing of the Chinese economy turned out
to be unfounded. Since 2009, the Chinese
economy has grown by an average 9.2% a
year and has contributed about half of the
global output expansion. A slowdown in the
first half of 2013 turned out to be temporary
and the Chinese economy is now
accelerating again, driven by an expanding
middle class and a shift from the traditional
export-led model to a more domestic
consumption-driven one. As a result, QNB
Group expects 8.0%-8.5% Chinese growth
next year.
Third, the announcement on May 18, 2013 of
a potential scaling back of the Fed ’s asset
purchase program—the so-called tapering of
Quantitative Easing (QE)—turned the winds
against most EMs. Global capital flew out,
leaving EMs with large current-account
deficits scrambling for cover. Brazil, India,
Indonesia, South Africa and Turkey all
experienced a substantial weakening of their
currencies and a slowdown in economic
activity. Brazil, in particular, entered into a
recession in Q3 2013. Capital flight is likely
to continue as QE tapering is implemented
next year. As a result, EMs will be forced to
reduce their own economic growth in order
to bring their current account deficits back
to a sustainable level by tightening both
fiscal and monetary policy.
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.

2. QNB Economics
economics@qnb.com.qa
December 29, 2013
Weekly Commentary
EM Fund Flows
Fed Balance Sheet and S&P 500
(bn USD)
40
4
30
Fed Balance Sheet (tr USD) (Left Axis)
S&P 500 Index (Right Axis)
20
2000
3
10
2500
1500
0
2
-10
1000
-20
May 18, 2013
QE Tapering
Announcement
Bond
Equity
-30
-40
2012
2013
Mar-13
2011
May-12
Source: EPFR Global
Jul-11
2010
Sep-10
Jan-09
2009
Nov-09
-50
So, where is the global economy heading in
2014? The answer lies in the direction of
monetary policy going forward. Central
banks around the world have engaged in an
unprecedented monetary stimulus to get the
global economy out of the Great Recession
of 2009. In doing so, they have flushed the
global economy with unprecedented
amounts of liquidity. The Fed, for example,
has increased its balance sheet fivefold to
USD4tn by purchasing US long-term
government debt and mortgage-backed
securities. This has reduced long-term
interest rates (including mortgage rates) to
historic lows, fueling house prices and
equity indexes (see chart). In the meantime,
the US economy is still struggling to gather
significant momentum to achieve its longterm growth potential.
1
500
0
2009
0
2010
2011
2012
2013
Source: Bloomberg
On December 18, the Fed announced that it
will reverse course starting in January 2014
by tapering QE. Inevitably, this will lead to
higher long-term interest rates. According to
QNB Group, the US 10-yr bond yield is likely
to rise to 3.5% in 2014. This will have a
negative impact on the US housing market
and construction activity. It will also reduce
the wealth effect currently fueling higher
US domestic consumption. In the same vein,
equity prices are likely to be affected by
higher interest rates through higher
discounting of future earnings and lower
dividends from weaker growth. For 2014,
this may imply a healthy downward
adjustment in asset prices, bringing them to
a more sustainable level in line with
fundamentals.
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.

3. Weekly Commentary
Other central banks are following the Fed’s
example. The ECB issued nearly EUR530bn
in crisis loans to European banks in March
2012, half of which have now been repaid.
The Bank of England has announced that it
will no longer increase its QE program and
will instead start increasing interest rates
once unemployment falls below 7%. The
only exception is the Bank of Japan, which is
sticking to its goal of doubling the money
supply by outright purchases of government
bonds.
QNB Economics
economics@qnb.com.qa
December 29, 2013
Overall, the change in direction of monetary
policy signals the end of an era of
unprecedented cheap money. As interest
rates rise globally, a downward adjustment
in asset prices is inevitable. At the same
time, a rotation away from more risky EM
investments to safer asset classes in
advanced economies is likely. According to
QNB Group, this change in direction is going
to be bumpy for the global economy as
higher interest rates and lower asset prices
will inevitably feed into weaker global
consumption and investment.
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.