Goldman Sachs 2012 Annual Report Download - page 39

Management’s Discussion and Analysis
Business Environment
Global economic conditions generally weakened in 2012,
as real gross domestic product (GDP) growth slowed in
most major economies. Market sentiment was affected by
continued broad market concerns and uncertainties,
although positive developments helped to improve market
conditions. These developments included certain central
bank actions to ease monetary policy and address funding
risks for European financial institutions. In addition, the
U.S. economy posted stable to improving economic data,
including favorable developments in unemployment and
housing. These improvements resulted in tighter credit
spreads, higher global equity prices and lower levels of
volatility. However, concerns about the outlook for the
global economy and continued political uncertainty,
particularly the political debate in the United States
surrounding the fiscal cliff, generally resulted in client risk
aversion and lower activity levels. Also, uncertainty over
financial regulatory reform persisted. These concerns
weighed on investment banking activity, as completed
mergers and acquisitions activity declined compared with
2011, and equity and equity-related underwriting activity
remained low, particularly in initial public offerings.
However, industry-wide debt underwriting activity
improved compared with 2011. For a further discussion of
how market conditions may affect our businesses, see
“Certain Risk Factors That May Affect Our Businesses”
below as well as “Risk Factors” in Part I, Item 1A of our
Annual Report on Form 10-K.
Global
During 2012, real GDP growth declined in most advanced
economies and emerging markets. In advanced economies,
the slowdown primarily reflected a decline in consumer
expenditure and fixed investment growth, particularly in
Europe, as well as a deceleration in international trade
compared with 2011. In emerging markets, growth in
domestic demand weakened, although the contribution
from government spending was generally positive.
Unemployment levels declined slightly in some economies
compared with 2011, but increased in others, particularly
in the Euro area. The rate of unemployment continued to
remain elevated in many advanced economies. During
2012, the U.S. Federal Reserve, the Bank of England and
the Bank of Japan left interest rates unchanged, while the
European Central Bank reduced its interest rate. In
addition, the People’s Bank of China lowered its one-year
benchmark lending rate during the year. The price of crude
oil generally declined during 2012. The U.S. dollar
weakened against both the Euro and the British pound,
while it strengthened against the Japanese yen.
United States
In the United States, real GDP increased by 2.2% in 2012,
compared with an increase of 1.8% in 2011. Growth was
supported by an acceleration in residential investment and a
smaller decrease in state and local government spending,
which were partially offset by a slowdown in consumer
spending and business investment. Both house prices and
housing starts increased. Industrial production expanded in
2012, despite the negative impact of Hurricane Sandy
during the fourth quarter. Business and consumer
confidence declined during parts of the year, primarily
reflecting increased global economic concerns and
heightened uncertainties, but ended the year higher
compared with the end of 2011. Measures of core inflation
on average were higher compared with 2011. The
unemployment rate declined during 2012, but remained
elevated. The U.S. Federal Reserve maintained its federal
funds rate at a target range of zero to 0.25% during the year
and extended its program to lengthen the maturity of the
U.S. Treasury debt it holds. In addition, the U.S. Federal
Reserve announced an open-ended program to purchase
U.S. Treasury securities and mortgage-backed securities, as
well as a commitment to keep short-term interest rates
exceptionally low until the unemployment rate falls to
6.5% or inflation rises materially. The yield on the 10-year
U.S. Treasury note fell by 11 basis points during 2012 to
1.78%. In equity markets, the NASDAQ Composite Index,
the S&P 500 Index and the Dow Jones Industrial Average
increased by 16%, 13% and 7%, respectively, compared
with the end of 2011.
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