Morgan Stanley 2014 Annual Report Download - page 66

Global Market and Economic Conditions.
During 2014, global market and economic conditions displayed a continued but choppy improvement from 2013,
characterized by continued global central bank accommodations, low inflation, geopolitical tensions, and sharply
lower oil prices during the final months of the year. The U.S. economy which started 2014 with a weather-impacted
first quarter decline in gross domestic product (“GDP”) ended the year with an annualized GDP growth rate of
2.4%. The Eurozone economy by contrast stalled in the second quarter before showing some signs of improvement
in the second half of the year, as the annexation of the Crimea region in Ukraine by Russia and conflict in Eastern
Ukraine raised anxiety and tensions which weighed on regional economies. In the United Kingdom (“U.K.”), GDP
growth continued to accelerate, with an annualized growth rate of 2.6% for all of 2014, while the Japanese economy
saw substantial volatility surrounding a national sales tax hike to 8% from 5% in April, resulting in a GDP growth
rate near zero for all of 2014. In China, the government continued reforms to change the structure of the Chinese
economy, accepting a somewhat less rapid growth pace as deleveraging is pursued, but targeted easing measures by
the Chinese central bank supported a 7.4% gain in real GDP in 2014.
In the U.S., major equity market indices ended the year significantly higher compared with year-end 2013, with
the S&P 500 stock index posting a gain of 11.4% for the year, supported by the relative strength of the U.S.
economy. The growth in U.S. GDP was driven by an improving labor market, with the unemployment rate
dropping below 6% for the first time in six years to end 2014 at 5.6%, a 1.1% decline from the end of 2013.
Average wage growth remained tepid, however, and inflation continued to run well below the Federal Reserve’s
2% target. Household spending growth accelerated markedly over the course of 2014, supported by strong job
growth and lower energy prices, while business investment also accelerated during the second and third quarters
of 2014, but showed signs of sluggishness during the fourth quarter as uncertainty about global economic
conditions increased. The recovery in the housing market remained slow, hampered by tight mortgage lending
conditions. In October 2014, the Federal Open Market Committee (“FOMC”) of the Federal Reserve ended its
quantitative easing program with its final $15 billion reduction in monthly bond purchases. At December 31,
2014, the federal funds target rate remained between 0.00% and 0.25%, while the discount rate remained at
0.75%. At its December 2014 meeting, the FOMC announced that it would be patient in beginning to normalize
its stance on monetary policy.
In Europe, major equity market indices ended the year lower compared with year-end 2013 except for the
DAX 30 index in Germany, which ended the year with a 2.7% gain. Euro-area GDP growth turned positive after
declining in 2013, but the recovery was sluggish at less than 1% for 2014, and market-based measures of
Eurozone inflation expectations fell well below levels consistent with the European Central Bank’s (“ECB”) 2%
inflation target, prompting an announcement of additional easing measures in September 2014, including a cut in
the benchmark repurchase rate to 0.05% from 0.25% and in the deposit facility rate to negative 0.20% from
0.00% at the end of 2013, and the announcement of asset-backed securities and covered bond purchase programs.
In January 2015, the ECB announced an expanded asset purchase program involving the purchase of Euro-area
sovereign debt. In the U.K., stronger GDP growth in 2014 was supported by faster growth in consumer spending,
business investment and residential investment, but export performance was sluggish. The U.K. also continued to
experience significant declines in unemployment, while average wage gains also remained tepid, and inflation
fell below the Bank of England’s (“BOE”) target. At December 31, 2014, the BOE’s benchmark interest rate was
0.5%, which was unchanged from December 31, 2013, and BOE asset purchases remained at £375 billon, also
unchanged from December 31, 2013.
Major equity market indices in Asia ended 2014 higher compared with year-end 2013, except for the
KOSPI Composite index in the Republic of Korea, which ended the year down 4.8%. Japan’s economy resumed
growth after the mid-year recession following the April 2014 tax increase, with support from a substantial
increase in asset purchases announced by the Bank of Japan in October 2014 and strong exports. China’s annual
rate of economic growth has slowed slightly but remained above 7%, which is strong compared with the rest of
the world. Nonetheless, the Chinese economy still faces downward pressure, and its government plans to respond
with targeted measures to boost growth. The Chinese government’s announced reforms reflect its intention to
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