The world's most important central banks did exactly what they needed to do in response to last week's terrorist attack on the US. In cutting interest rates by 0.5 percentage points on Monday, the Federal Reserve and the European Central Bank gave well-timed support to the global economy. Unfortunately, they are fighting to rescue a world economy already in recession. After the assault, the probability is of a still longer and deeper slowdown.

The state of the world economy before September 11 is clear. "Over the last four quarters," as the staff of the International Monetary Fund explained in the draft of their latest World Economic Outlook, "the major advanced countries have for the first time since the early 1980s experienced a broadly synchronised growth slowdown."

In the second quarter of 2001, global output fell. US output grew at an annualised rate of just 0.2 per cent. So did that of the eurozone. As for hapless Japan, it has slipped into its fourth recession in the past 10 years, with an annualised decline in output of 3.2 per cent. Among the group of seven leading economies, the UK grew fastest, at an annual rate of 1.3 per cent. Output declined in most of emerging east Asia in the second quarter, the most significant exception being China. Latin America's aggregate output also shrank, led by Brazil and Argentina.

A slowdown this synchronised has not occurred since the mid-1970s. Behind it lie three proximate causes.
• The shared shock of the sharp rise in oil prices in 2000, which has proved more enduring than initially expected.
• The tightening of monetary policy in both the US (where the Federal Reserve's interest rate rose from 4.75 per cent in early 1999 to 6.5 per cent in 2000) and the eurozone (where the European Central Bank's "repo rate" rose from 2.5 per cent in mid-1999 to 4.75 per cent at the end of last year).
• A sharp re-evaluation of the prospects for the "new economy" sectors of "technology, media and telecommunications".

Yet these developments would have had a far smaller impact if it were not for pre-existing economic vulnerabilities. One was the long-standing plight of the second largest economy, Japan. Another was the lack of animal spirits in much of continental Europe. Yet another was the dependence of export-driven east Asian emerging market economies on demand created by the US technology boom. A final source of weakness was the crowding out of emerging market economies from risk-averse financial markets: net capital flows to emerging market economies fell from $233bn (£158bn) in 1996 to a mere $2bn last year.

The effect was to make the world economy extraordinarily dependent on a US economy that generated two-fifths of the increase in global demand (at market prices) over the past five years. That motor has now stalled. This is not at all surprising. A correction in the US economy was bound to occur as soon as unrealistic expectations about profits, productivity and growth were falsified. The question had been when. The answer was 2001.

The downturn has been driven by an inventory correction and reduction in investment. US business investment fell at an annual rate of 15 per cent in the second quarter. In August, industrial output was 5 per cent below its peak of September 2000. Such corrections were likely to bottom out, particularly after the Federal Reserve had lowered its rates by 3 percentage points. Yet it was unlikely that the central bank would secure a swift and sustained recovery. Recessionary forces were too strong.

First, profitability has been collapsing: the share of corporate profits in gross domestic product fell by more than a quarter between its 1997 peak and the second quarter of this year; the ratio of pre-tax profits to net worth in the non-farm, non- financial sector fell from 9 per cent to 5 per cent.

Second, analysts' expectations for profits and earnings were grotesquely unrealistic, with forecasts of a 19 per cent rise in earnings on the Standard & Poor's 500 next year and 14 per cent a year over the next five years.

Third, expectations of 3 per cent a year trend growth in labour productivity were also a mirage. A good part of the acceleration in productivity growth of the late 1990s was cyclical or driven by unsustainable increases in the capital stock.

Fourth, the stock market remained highly valued by historical standards. The ratio of stock market capitalisation to US GDP rose from 20 per cent in 1980 and 40 per cent in 1991 to a peak of 155 per cent last year; it was, after the fall, still over 100 per cent of GDP on Monday.

Fifth, as Charles Dumas of London-based Lombard Street Research notes, business debt, at 150 per cent of GDP, was as high as in Japan in the early 1990s.

Sixth, household incomes are likely to drop in early 2002, as a result of lower bonuses, the reduced value of stock options and rising unemployment. Household debt is at a record level in relation to disposable incomes. The personal savings rate is negative. The rise in home values has offset only a modest part of the drop in equity wealth since the first quarter of 2000.

Seventh, the rise in the share of private investment in GDP and decline in the rate of private savings generated much the largest private sector financial deficit in US history. At its peak in late 2000, it reached almost 7 per cent of GDP. Normally the private sector runs a modest surplus.

Against this background, a downward spiral of falling stock prices, lay-offs, slowing consumption, further reductions in investment, falling output and further weakness in stock prices was already likely. There might have been a short-term bounce in the US economy. But the corrective forces already at work were too strong to make full and sustained recovery probable.

Now even a short-term bounce seems inconceivable. The terrorists have succeeded in pushing the US - and, given its central economic role, the world - closer to an economic abyss. There is bound to be a huge jump in uncertainty, not just in the US, but also worldwide, as some sort of war looms. This uncertainty is likely to persuade businesses to postpone investment and accelerate lay-offs. Households are equally likely to postpone consumption. Recession looms, not only in the US, but elsewhere as well.

Yet if the US fails to restart its economy, nobody else is likely to take its place. Japan and the emerging market economies are in no position to inject dynamism into global final demand. That leaves Europe. Even there a surge in demand sufficient to offset another downward leg in the US slowdown is beyond one's wildest dreams. A return to trend growth is the best that seems conceivable.

Against this background, getting policy right is both vital and difficult. The world desperately needs a boost to short-run confidence, along with smooth adjustments to unsustainable external and internal financial balances. But this, alas, is not something policymakers can fine-tune.

The cuts in interest rates are a start. But they will need to go further, particularly in Europe. Europe has a global responsibility, not just a regional one. As for Japan, it must address its problems systematically.

Fiscal policy will also have to play a significant role. Fortunately, this is possible in a number of Group of Seven countries. It would have been still easier for the US if the administration had not already decided to mortgage the fiscal future.

The sad fact is that the outrage hit an already vulnerable world economy. Since the US is itself among the most vulnerable, it cannot save the day unaided. There must be a worldwide response, with Europe playing a central role. We must avoid panic, since fear is itself destructive. But complacency could be even worse. Now, if ever, is a time to err on the side of action. martin.wolf@ft.com