2013 ANNUAL REPORT 15 United Kingdom Europe Brazil China Australia Economic growth in the UK continued to advance in the fourth quarter, with real GDP expanding by 2.8%. During a year in  which growth was largely supported by consumption, retail sales surged 5.3% in December relative to the same period in 2012.  This robust end to the year helped to generate full year 2013 economic growth of 1.8%. While consumption is expected to remain  supportive of growth in the year ahead, we believe investment and exports are likely to become the main drivers of the UK  economy. Although industrial production remains nearly 9% below pre-recession levels, recent business confidence surveys and  PMI data indicate that activity is poised to accelerate. Moreover, the labour market ended the year with an increase of 280,000  jobs in the three months to November, the largest increase on record, with almost all of the increase in permanent, full-time  employment. As a result, the unemployment rate fell to just 7.1%, only slightly above the 7.0% target adopted by the Bank of  England under its forward guidance policy. The improving labour market is likely to place additional pressure on the central  bank to revisit its current low interest rate policy, although Bank of England officials have not provided any indication that rate  hikes are on the horizon and inflation has eased back to the official target. Overall, it is likely that monetary policy will remain  accommodative in 2014 and we expect the UK economy to generate growth of 2.5% during the course of the year. Near-term growth in Brazil weakened during the fourth quarter to approximately 2.0% year-over-year, as rising interest rates  and currency volatility continued to challenge the economy. Although the rate of inflation has fallen from a peak of 6.7% in  July to 5.9% in December, the rate remains near the upper end of the target range set by Brazil’s central bank. Moderating food  prices have helped to lower overall inflation and recent agricultural commodity price declines suggest that food inflation may  slow further, but energy and transport prices may become sources of inflationary pressure going forward. In an attempt to curb  rising price levels, the Brazilian central bank increased the benchmark interest rate by 275 basis points in 2013 and an additional  50 basis points in January 2014, to a level of 10.5%. Despite this tightening of monetary policy, the Brazilian Real depreciated  by 15.0% over the course of the year, as investors reduced holdings of emerging market currencies. Importantly, the decline in  the exchange rate should help to offset the drag that net exports have recently placed on Brazilian growth. In a further positive  sign, the share of GDP growth from investment has been increasing in recent quarters and currently stands near 20.0%, as the  economy strives to meet the demands of a growing middle class. Although we anticipate that current challenges are likely to  persist, we believe that recent levels of growth are well below Brazil’s long-term potential. Accordingly, we continue to expect  that subdued growth in the short term will give way to longer-term growth in the range of 3.0% to 4.0%. Real GDP growth in China slowed slightly to 7.7% during the fourth quarter but remained firmly within the central government’s  target range. Although nominal GDP growth remains near 10.0%, economic indicators are suggesting a modest level of  deceleration. Additionally, optimism surrounding market reforms is softening, as fixed asset investment grew by nearly 20% in  2013 and supplied approximately 45% of total nominal GDP. Although retail sales increased 11.5% over the same time period,  private consumption only contributed 36% to total nominal GDP, suggesting the transition from an investment-based economy to  a consumption-based economy will be a long-term process. The Chinese central bank remains concerned over the pace of credit  growth and has been selective in efforts to ease interbank liquidity, resulting in sporadic volatility within the lending market.  Moving forward, slower credit expansion is likely, which may weigh on overall growth. Nonetheless, we view recent policy  decisions intended to accelerate the transition away from an investment-led economy as positive developments and expect that  growth in the services sector within China will be meaningful over the coming years. On a relative basis, the Australian economy continues to produce solid results, with annualized real GDP growth of 2.3% in the  third quarter. However, this result marks the fourth consecutive quarter of growth below historical averages, as the pace of mining  investment has begun to decelerate. A key driver of recent economic growth, mining investment has plateaued and will subside  over the next few years as capital intensive mega projects commence production. We expect the Australian economy to revert to  trend-line growth of 3.0% by 2015, with increases in residential construction and government infrastructure investment expected  to help mitigate the effects of declining mining investment. Importantly, the Australian economy continues to be supported by  accommodative monetary policy, with the base rate currently at a historical low of 2.5%. This environment has led to strong  Positive economic developments in the Eurozone continued in the fourth quarter, with real GDP growth of 0.4% on a year-over- year basis. Growth has improved in Germany and France to 1.4% and 0.5%, respectively, while the pace of decline continues to  moderate in Italy, Spain and Greece. Additionally, the Eurozone trade balance is near record highs, as Germany continues to run  a large trade surplus while peripheral countries have reduced their trade deficits. A stronger external environment should provide  additional support for Eurozone economies in 2014, although debt levels remain high in many member states and a roadmap to  deleveraging remains elusive. Eurozone inflation continues to trend below 1.0%, as the rate of price growth slows or declines  in many countries. This weakness raises the possibility of deflation, although the European Central Bank appears determined to  avoid such a situation. Looking ahead, we believe European policymakers will need to make further progress on reforms during  2014 while carefully managing the dual risks of debt deleveraging and potential deflation.