Goldman Sachs 2007 Annual Report Download - page 42

Management’s Discussion and Analysis
EUROPE. Real gross domestic product growth in the Eurozone
economies slowed to an estimated 2.7% in calendar year 2007,
down from 2.9% in 2006. Industrial production and fixed
investment slowed as the year progressed, while growth in
consumer expenditure was weak throughout the year. Surveys
of business and consumer confidence declined. However, the
labor market strengthened, as evidenced by a decline in the
unemployment rate. Measures of core inflation increased during
the year. The European Central Bank (ECB) continued to raise
interest rates, increasing its main refinancing operations rate
by a total of 75 basis points to 4.00% by the end of June. The
ECB left the rate unchanged for the rest of our fiscal year, but
engaged in measures to improve liquidity conditions in the last
four months of the year. In the United Kingdom, real gross
domestic product rose by an estimated 3.1% for calendar year
2007, up from 2.9% in 2006, but showed signs of slowing late
in the year due to credit market concerns and a slowdown in
the U.K. housing market. Measures of inflation remained
elevated during the year. The Bank of England increased interest
rates, raising its official bank rate by a total of 75 basis points
to 5.75%. Long-term bond yields in both the Eurozone and the
U.K. ended the year higher. The Euro and British pound
appreciated by 11% and 7%, respectively, against the U.S. dollar
during our fiscal year. Major European equity markets ended
our fiscal year higher.
ASIA. In Japan, real gross domestic product growth slowed to
an estimated 1.9% in calendar year 2007 from 2.4% in 2006.
Measures of investment activity in the housing sector and
growth in consumption declined during the year. Export growth
remained solid but showed signs of deterioration towards year
end as the environment outside of Japan worsened. The rate of
inflation remained near zero percent during the year. The Bank
of Japan raised its target overnight call rate by 25 basis points
for the second consecutive year, bringing it to 0.50%, while the
yield on 10-year Japanese government bonds declined slightly
during our fiscal year. The yen appreciated by 4% against the
U.S. dollar. The Nikkei 225 Index rose during the first eight
months of our fiscal year but declined significantly in August,
and ended our fiscal year essentially unchanged.
In China, real gross domestic product growth accelerated to an
estimated 11.4% in calendar year 2007 from 11.1% in 2006,
with continued strength in exports, as demonstrated by China’s
large and growing current account surplus and foreign exchange
reserves. Industrial production accelerated during the year,
while domestic demand softened but remained solid. The rate
of inflation increased, particularly during the second half of the
year. The People’s Bank of China raised its one-year benchmark
lending rate by a total of 117 basis points to 7.29% and took
additional measures to reduce liquidity in the financial system.
The government continued to allow the steady appreciation of
its currency, which ended our fiscal year nearly 6% higher
against the U.S. dollar. Elsewhere in Asia, real gross domestic
GLOBAL. Growth in the global economy slowed over the course
of 2007. Although the pace of economic growth was solid
through the beginning of our third fiscal quarter, global growth
in the latter part of our fiscal year was impacted by volatility
in the credit markets, particularly in the U.S. and Europe, and
accelerated weakness in the U.S. housing market. Fixed income
and equity markets experienced high volatility, particularly
during the second half of the year. The U.S. mortgage market
experienced significant deterioration throughout the year,
particularly in subprime loans and securities. The broader
global credit markets were characterized by significant weakness
in the second half of the year, which was evident in the significant
dislocation in money market rates in the U.S. and Europe. The
U.S. Federal Reserve lowered its federal funds target rate
towards the end of our fiscal year, while central banks in the
Eurozone, United Kingdom, Japan and China all raised rates
during the year. Oil prices rose significantly during our fiscal
year and, in the currency markets, the U.S. dollar weakened
against most major currencies, particularly against the Euro
and the British pound. Corporate activity was generally strong
during our fiscal year, reflecting significant growth in mergers
and acquisitions and equity underwritings, as well as strength
in leveraged finance during the first half of our fiscal year.
UNITED STATES. Real gross domestic product growth in the
U.S. economy slowed to an estimated 2.2% in calendar year
2007, down from 2.9% in 2006. While economic growth was
generally solid during the first nine months of our fiscal year,
activity appeared to decelerate sharply during the fourth quarter.
Much of the slowdown was attributable to the housing market,
as sales of new and existing homes and residential real estate
investment declined, as well as to the weakness in credit markets.
Growth in industrial production slowed from 2006 levels,
reflecting reduced growth in domestic demand, partially offset by
stronger growth in net exports. Although business confidence
remained fairly strong, consumer confidence declined over the
course of the year. Growth in consumer expenditure was strong
in the first quarter but declined thereafter, as concerns about the
housing market intensified and oil prices rose. The unemployment
rate rose during the second half of our fiscal year and ended
the year higher. The rate of inflation increased sharply over our
fiscal year, as energy prices rose significantly. Measures of core
inflation, while slowing from 2006 levels, accelerated towards
the end of the year. The U.S. Federal Reserve reduced its federal
funds target rate by a total of 75 basis points to 4.50% during
our fourth quarter, the first reductions since 2003. Beginning
in August, the U.S. Federal Reserve also took other measures
to improve liquidity in credit markets. Although the 10-year
U.S. Treasury note yield rose during the first half of our fiscal
year, it subsequently declined as credit concerns took hold, and
ended the year 58 basis points lower at 3.97%. The Dow Jones
Industrial Average, the S&P 500 Index and the NASDAQ
Composite Index ended our fiscal year higher by 9%, 6% and
8%, respectively.
40 Goldman Sachs 2007 Annual Report