Cameron warns of risk of new Great Depression

The world could slide into a 1930s-style depression, David Cameron has claimed, as the G20 summit struggled to find common ground on the best way to boost the global economy.

British officials played down the prospect of a resolution of the escalating dispute between China and the US over the value of their currencies.

The leaders, meeting in the South Korean capital, Seoul, are finding it difficult to recapture the spirit of unity which was achieved at the London summit 19 months ago, at which they agreed a $1trillion (£625bn) stimulus package for the world economy.

Speaking ahead of the detailed negotiations overnight, Mr Cameron warned of disaster if disputes over currency levels – vital for making nations' exports competitive – meant that the world's major economies looked inwards.

The main flashpoint has been the recriminations between the United States and China. Washington is accusing Beijing of keeping the value of its currency, the yuan, artificially low to give its exports a huge competitive advantage.

The Chinese, who have lent the US nearly $800bn, are resisting the pressure and believe the US has been hyprocritical in pumping $600bn (£375bn) into its coffers – a move also apparently designed to keep the dollar low.

Yu Jianhua, an official with China's Ministry of Commerce, said that Beijing didn't want a confrontation with the US over currencies or trade issues, but that Washington "should not politicise the yuan issue; should not blame others for its domestic problems and should not force others to take medicine for its own disease".

The US Treasury Secretary, Timothy Geithner, denied the charge: "We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy."

He renewed his criticism of China for stoking inflation by its strict controls on money supply. Asked what his biggest anxiety was for the G20, Mr Cameron replied: "A return to what happened in the 1930s: protectionism, trade barriers, currency wars, countries pursuing beggar-my-neighbour policies; trying to do well for themselves but not caring about the rest of the world. That is the danger.

"So it's in our interest to keep world trade moving; to keep those trade barriers down. That's our interest at the G20 and we will pursue it very, very vigorously."

Mr Cameron insisted the G20 meeting – where the "big battle" would be combating isolationism – was vital. But he warned against expectations of solving such problems as reconciling the huge debts accumulated by western countries with the large surpluses of money built up by developing nations – notably China. He said the G20 was not going through an "heroic phase".

UK officials said there was no prospect the issues would be solved at this summit – or others in the near future – but that at least negotiations prevented the world's biggest economic powers from retreating into isolation.

Russian officials said they were "especially worried by attempts by a number of countries to take unilateral decisions to weaken their currencies" to stimulate growth.

President Obama said he was confident leaders would agree a programme for promoting balanced growth.

A communiqué is expected today. But the problems ahead in agreeing anything but the most anodyne form of words were spelt out by Montek Singh Ahluwalia, the Indian chief G20 negotiator: "I don't think you should be too demanding... such policy coordination has never been attempted."

Mr Cameron held a series of bilateral meetings with fellow leaders, including South Korea's President Lee Myung-bak, Russian President Dmitry Medvedev and Indian Prime Minister Manmohan Singh, in the run-up to the official opening of the summit.

He accepted an invitation to visit Russia next year, which will be the first by a British Prime Minister for six years. It comes with the hope of thawing relations, which have been deep-frozen following the murder of Alexander Litvinenko, a prominent critic of Vladimir Putin, in London in 2006.

* Household wealth in the United Kingdom fell faster during the recession – set off by the 2008 banking crisis – than at any other time in the past 60 years, the Official for National Statistics revealed yesterday.

Gross Domestic Product per head of population – which is the standard indicator used to measure how well an economy is doing – fell by 5.5 per cent in a single year, the largest fall since 1949, taking the economy back to its 2004 level.

G20: Those rows in full

Currency wars

The Fed's injection of $600bn into the US economy a week ago was a declaration of war. The Americans argue, unofficially, that their move is belated retaliation for the Chinese refusal to let the yuan float upwards. It signals that the US is ready to "print" as many dollars as it takes to keep the dollar low, US exports competitive and those from China, Germany and Japan less attractive to US consumers. The only good news is it might just stem the rise of protectionism in America.

For a counter-attack the Chinese have an impossible choice; start buying those dollars, selling their yuan to push the value of the dollar back up – in the knowledge that the US can just print even more and, eventually, overpower them. That will leave China with $2 trillion-plus of badly devalued US Treasury bills and other dollar assets. Or they can let their exports get more expensive, sacrificing growth and jobs. President Obama argues that a healthy US market is good for everyone; China, Indonesia and Brazil think otherwise. India is a rare American ally.

The Chinese, Germans, Russians and Japanese have also ridiculed a US proposal to cap trade surpluses. Mervyn King of the Bank of England was more gently dismissive. The Koreans are OK with it. The UK, by the way, got its devaluation of sterling in early – down 20 per cent on its 2007 peaks – and can afford to be more relaxed, for now.

Chances of agreement Nil, until the French take over the G20 next year.

Financial regulation

The glacially slow process of dealing with the "too big to fail" banks should make progress. The "Basel III" rules will make banks hold more reserves for when they get into trouble. The 30 most important banks in the world – the "sifis" or systemically important financial institutions – will be made to write "living wills" so they can be wound down without global meltdown.

Chances of agreement Unusually high.

Other business

Monty Python's Argument Clinic has nothing on Seoul. Some "bilaterals" around the G20 will be ugly. The Japanese want the Russians to give them the Kuril Islands back; the Chinese and Japanese are in bitter dispute over the Spratlys. The Russians resent US failure to ratify the Start nuclear arms treaty. The Doha trade talks (born 2001) have become a blame game.

Chances of agreement Let's just say it's good to talk.

Sean O'Grady, Economics Editor