Depression overshadows G20 summit

By Thomas Atkins

DUBAI (Reuters) - The "D" word has crept into the debate ahead of the Washington G20 crisis summit. Not Deflation, but Depression.

The result -- according to the thinking of some officials, advisors and strategists gathered at a meeting of the World Economic Forum in Dubai -- is that governments and central banks should throw caution to the wind and combat the crisis with every means available.

"There is a real possibility of a real, deep, international depression," said one senior monetary official, who spoke on the condition of anonymity, calling the crisis "the worst in 100 years".

As the financial crisis chokes the economy and lending to most corners of business remains all but stopped, economists have cut forecasts, with recession now a certainty in leading western economies and the likelihood increasing of deflation and even a global depression.

To put that in context, a depression is defined by some as a severe and long recession characterised by high unemployment, and by others as a 10 percent fall in output -- something that has not occurred globally since the 1930s.

"This financial crisis has now started to undermine the real economy in a very severe way," said a senior executive at a major international bank who plans to attend the Washington summit.

This week, the International Monetary Fund has warned the world's richest economies face their first year of contraction since World War II and leading central banks have resorted to drastic action.

The Bank of England shocked markets with a 1.5 percentage point rate cut and the European Central Bank cut by half a point, leading top central banks on a path toward the 1 percent rate now set by the U.S. Federal Reserve.