As a global provider of financial services, Goldman Sachs is affected by overall macroeconomic and market conditions in various regions around the world. For a number of years, we have operated in a generally favorable macroeconomic environment characterized by low inflation, low and declining interest rates and strong equity markets. In particular, the U.S. economy, the largest in the world and an important influence on overall world economic activity, has been undergoing one of the longest periods of post-war economic expansion. As of March 1999, the current U.S. expansion had lasted 96 months compared to a post-war average period of expansion of 46 months.

Recognizing that the favorable macroeconomic and market environments will be subject to periodic reversals, which may significantly and adversely affect our businesses, we believe that significant growth and profit opportunities exist for financial intermediaries in the United States and abroad. These opportunities derive from several long-term trends, including the following:

  • Deregulation. Financial market deregulation, including the elimination of bank deposit interest rate ceilings and the expansion of commercial banks and other financial institutions into securities underwriting activities, has resulted in the creation of new and broader sources of credit, which have reduced the variability and the cyclicality in the supply of credit. This, in turn, has in the past reduced volatility in economic activity, leading to longer economic expansions with increased investment spending, resulting in higher levels of capital raising;

  • Globalization. Heightened global competition has created a need for cross-border capabilities and economies of scale, resulting in increased joint venture and mergers and acquisitions activity;

  • Focus on Shareholder Value. Increasing focus on shareholder value has fueled an increase in restructuring and strategic initiatives, yielding additional financial advisory and capital-raising opportunities;

  • Consolidation. Moderate growth, limited pricing flexibility and the need for economies of scale have substantially increased consolidation opportunities in certain industries, and record levels of profit have provided companies with the resources to pursue strategic combinations, creating substantial demand for mergers and acquisitions advisory services and subsequent capital raising;

  • Demographics. Changing demographics in the United States and other developed economies have increased the pool of savings available for private investment and the need for increased funding of pension plans due to the aging of the population, creating substantial demand for investment products and services; and

  • Financial Product Innovation. Technology and financial expertise have led to the development of new financial products better tailored to the risk/reward requirements of investors, increasing trading flows and proprietary investment opportunities.
We believe that over the last 15 years these trends, coupled with generally declining interest rates and favorable market conditions, have contributed to a substantially higher rate of growth in activity in the financial services industry than the growth in overall economic activity. The future economic environment may not be as favorable as that experienced in the last 15 years and, in particular, the period of declining interest rates in the United States may not continue. There may also be periods of adverse economic and market conditions. Nonetheless, we believe that these trends should continue to affect the financial services industry positively over the long term. However, see "Risk Factors — Market Fluctuations Could Adversely Affect Our Businesses in Many Ways" for a discussion of the effect that adverse economic conditions and market fluctuations can have on our businesses.

The following table sets forth selected key industry indicators:

Key Industry Indicators
($ in billions, except gross domestic product)
(volume in millions of shares)

As of or for Year Ended December 31,






General Economic Activity:
(in trillions)
Worldwide gross domestic product(1) $ 10 $ 18 $ 24 $ 29(9)
U.S. gross domestic product(2) 4 5 7 9 6
Advisory Activities/Financing:
Worldwide mergers and acquisitions(3) 96 527 460 2,522 24
Worldwide equity issued(3) 50 51 172 269 12
Worldwide debt issued(3) 146 631 1,546 2,932 22
World Equity Markets:
Worldwide equity market capitalization(4) 3,384 9,728 14,016 27,459 15
U.S. market capitalization(4) 1,898 2,794 5,136 13,451 14
FT/S&P Actuaries World Indices™ — The World Index(5) NA 129 178 359 11
Dow Jones Industrial Average 1,259 2,169 3,754 9,181 14
S&P 500 165 278 466 1,229 14
NYSE average daily volume 85 162 265 674 15
Invested Funds:
Worldwide pension assets(6) $1,900 $3,752 $ 6,560 $10,975 12
Number of U.S. mutual funds(7) 1,026 2,715 4,558 7,343 14
U.S. mutual fund assets(7) $ 293 $ 810 $ 2,075 $ 5,530 22

(1) Source: The Economist Intelligence Unit, January 1999.

(2) Source: U.S. Department of Commerce, Bureau of Economic Analysis.

(3) Source: Securities Data Company.

(4) Source: International Finance Corporation.

(5) Index is calculated on a local currency basis based on total returns. CAGR is based on 1988-1998 data. The FT/S&P Actuaries World Indices are owned by FTSE International Limited, Goldman, Sachs & Co. and Standard & Poor's Ratings Services. The Indices are compiled by FTSE International and Standard & Poor's Ratings Services in conjunction with the Faculty of Actuaries and the Institute of Actuaries.

(6) Source: InterSec Research Corp.

(7) Source: Investment Company Institute.

(8) Compound annual growth rate.

(9) Data as of December 31, 1997; CAGR 1983-1997.

We believe scale, global resources and leading market positions are important competitive advantages for financial intermediaries in this environment. In addition, we believe that circumstances in certain regions should provide opportunities for financial intermediaries.


The European Economic and Monetary Union commenced on January 1, 1999 and created a monetary union in Europe with a single currency. As a result, we believe that over time a pan-European capital market will develop that is likely to rival that of the United States in size and liquidity. We believe that financial intermediaries generally are expected to benefit from a number of anticipated developments, including:

  • pan-European consolidation and financial restructuring yielding an increase in mergers and acquisitions activity;

  • an increase in third-party assets under management and a major shift towards investments in equity securities due to an expected move to private pension fund systems, changing demographics and the elimination of intra-European Economic and Monetary Union currency risk;

  • a reallocation of equity portfolios to reflect pan-European indices;

  • the establishment of a European high-yield market to fund the growth of emerging high-growth industries and to satisfy investors' demands for higher yield; and

  • increased equity issuance and higher equity trading volumes.

Since 1997, the currency weakness and disruptions, the deterioration in certain of the region's banking systems, the weakness in the property sector in many of the region's countries, as well as slowing consumer income growth, have led to a significant and continuing weakening of these economies and their stock markets. These developments have adversely affected the economic and market conditions in the region and at times have affected economic and market conditions elsewhere. We believe, however, that financial intermediaries could have significant opportunities in this region if stability improves and the economies, which represent approximately 60% of the world's population, resume their growth. In the near term, these potential opportunities could include:

  • an increase in mergers and acquisitions and other financial advisory services in connection with corporate restructurings;

  • an increase in trading opportunities as financial intermediaries meet the liquidity needs of their clients; and

  • an increase in capital raising as Asian corporations and governments access the international capital markets rather than the regional banking system to refinance and to fund future growth.
In the longer term, these potential opportunities could include:
  • the emergence of corporate and real estate principal investment opportunities as a result of corporate and government restructurings; and

  • an increase in third-party assets under management and a major shift towards investments in equity securities due to an anticipated move to private pension fund systems, changing demographics and the relaxation of foreign exchange restrictions.
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