Emerging markets still in the driving seat

Remember the popular view earlier this year? That the emerging market party was over and 2014 would be all about the recovery in the West? The reality has been somewhat different, with recovery in the West disappointingly sluggish.

This year we expect the US economy to grow by only 2.2 percent - no more than the average since 2009. The eurozone has stagnated after growing by just 0.2 percent in the first three months of the year. And while 2014 is likely to be a better year for the global economy than 2013, once again the emerging markets are driving growth.

Transition has been a main theme for 2014, and this still holds true for both China and the United States. China is rebalancing its economy, and the US is normalizing its monetary policy, ending its quantitative easing (QE) program.

The theme of transition will continue to apply to 2015 and beyond, but next year also looks set to be one of great divergence, with monetary policy in major economies out of sync for the first time in years. The old model of growth, which was dependent on investment and exports, is unlikely to drive China through the next stage of its development from a middle-income to a high-income country. Consumption will have to gain more importance in the economy compared to investment, and the service sector needs boosting relative to construction and manufacturing.

With rebalancing comes a slowdown. And China is slowing. Authorities will be keen to ensure that the economic slowdown remains controlled, especially for the labor market and income growth.

The official Chinese growth target for this year is 7.5 percent. Given the weak performance in the past months, further policy easing will be required to achieve China's growth targets. But if we only focus on headline growth, we could miss China's significant structural progress. In the first half of this year, services accounted for half of China's growth, and disposable household income rose to 61 percent of GDP and should continue to trend higher.