nout wellink : the business cycle in perspective address by mr nout wellink, president of de nederlandsche bank and president of the bank for international settlements, on the occasion of akzonobel ’ s new year ’ s function for its management, 8 january 2003. * * * you are of course familiar with the phenomenon of perspective distortion, which makes things close by look bigger. interestingly, the effect becomes less strong as the distance from onlooker to object increases. similarly, a certain distance in time is often required in order to put things in their right perspective. this is why historians so seldom discuss events of less than several decades ago. economists and policy makers, however, cannot afford to keep that much distance. and by consequence, much of what they write and say shows the effects of perspective distortion : the current recession invariably looks greater than the previous one. architects in 15th century florence discovered how to draw a correct perspective. much later, the architects designing the building of the nederlandsche bank used this knowledge : by making the tiles that line the outside of the building larger for higher stories, they cancelled out the distortion in the eye of the observer below. today, i have set myself the ambitious goal of putting the business cycle in perspective. i intend to regard recent cyclical developments in the light of preceding business cycles. this gathering presents an eminent opportunity to discuss the international and dutch business cycles, for akzonobel is an international concern - active in 80 countries. but you are also a dutch company, with its head office established here and almost 20 per cent of production concentrated in this country. at the same time, i suspect that akzonobel has a greater than average interest in the analysis of cyclical developments : an important part of the firm ’ s activities - basic chemicals - may be characterised as early cyclical. for us, incidentally, this makes companies in this sector interesting, because they provide a leading indicator for the business cycle. the economic slowdown since the year 2000 has so far been roughly simultaneous in europe and north america. it has often been claimed that this is the result of the increasing economic intertwinement of both large blocks. that increase can, of course, hardly be denied. world trade today represents 17 % of global production, against only 8 % in 1914. and this excludes the increased internationalisation of businesses, through the establishment of branches and plants abroad and through cross - border mergers. also highly visible

is the fact that the connection between financial markets has become stronger over time. the terrorist attacks in the united states and the dubious accounting practices revealed in the aftermath of the enron collapse have hurt stock market sentiments world - wide. recent research conducted at the bank confirms this image : the correlation of german, british and us share prices has more than doubled over the past twenty years, from around 0. 30 to 0. 65. the simultaneous cyclical movements of the large economies are not determined primarily by increased intertwinement but through the occurrence of global shocks. cyclical coherence between germany and the us was especially strong in the aftermath of the oil crises of the 1970s. the current cyclical harmony is explained by two recent global shocks : the oil price rises and the bursting of the ict bubble. almost continuously for the ten years up to 1998, oil prices moved within a bandwidth of 10 - 20 euro per barrel. in the course of 1999 and 2000, however, the oil price rose by almost 300 % from the lower limit of this bandwidth to over 37 euros. since late 2000, oil prices have come down under the impact of global economic slowdown. but a possible war against iraq might push them up again. the second shock was caused by the bursting of the ict stock market bubble. share prices of ict companies took a plunge from the peak reached in march 2000, losing two - thirds of their value. ict investments - which in the us had risen by 10 % to 20 % every year since the early 1990s - have been falling since mid - 2000. the present synchronicity of international cyclical movements has largely been caused by these two shocks. there is a good possibility, however, that the international convergence will dissolve again when the effects of both shocks have ebbed away. when the tide turns, the speed of recovery may be different on both sides of the atlantic. another, related phenomenon is the decline in amplitude which cyclical waves have shown in recent years. in most industrialised countries, cyclical movements have been strongly damped since the first half of the 1980s. several explanations have been offered, one of which is the gradual shift in the economy from industry to services. this may cause damping because fluctuations in industrial production tend to be relatively large. the share of services in overall employment has increased from 47 % in 1960 to 70 % today. however, research based on us figures shows that this shift has played only a minor part : it appears that the industrial and