Chances of new Great Depression? One in three, says economist

There is a "one in three" chance that the current economic downturn could deteriorate into a full-blown worldwide debt-deflation cycle similar to the one that sparked the Great Depression, an economics expert has warned.

Gerard Minack, an economist with financial services and consultancy firm Morgan Stanley, said the current slowdown could last beyond its normal cycle because lower asset pricing, high levels of household debts and a shortage of cash in the system pose "substantial" risks for many Western economies, the Age reports.

"What makes this cycle different - and elevates the risk of a major unravelling - is the extremes that those trends have now reached," Mr Minack wrote in a note to clients, it added.

He cited the implosion of the US sub-prime market as the catalyst behind a chain reaction that has hit other debt and asset markets, pushing some economic indicators to levels not seen since the 1930s.

In the US, for example, the ratio of total debt compared to gross domestic product has hit levels previously seen at the height of the Great Depression. Mr Minack added that the close links between global markets means a drawn out slowdown in the US could well drag down the world economy.

"The time is coming when we will all have to take a view on whether this cycle downturn is 'the big one'," he said.

Mr Minack's warning comes after the International Monetary Fund published a new report forecasting a downturn in worldwide economic growth from five per cent last year to 4.1 per cent in 2008. In 2009, it is expected to fall further to 3.9 per cent, the study said.

The Great Depression was triggered by the 1929 stock market crash. In many countries, it lasted until the onset of the war economy during WWII.

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