If the annual meetings of the governing ministerial committees of the International Monetary Fund and the World Bank had been held, as originally intended, at the end of September, the mood would have been unrelievedly grim.

The US was embarking on what seemed certain to be a long and uncertain war against terrorism, the price of oil had recently spiked above $30 a barrel, and world stock markets had recovered only modestly from their post-September 11 troughs. A global recession seemed inevitable.

By the time the meetings were eventually held in mid-November, there were at least a few scraps of comfort for policy-makers to cling to. The Taliban regime was crumbling, the price of oil had slipped below $18 a barrel, and equities had risen much more strongly. A new round of world trade talks has been launched.

Since then, the hopeful signs have continued. Some countries, such as France and the UK, appear to be weathering the storm reasonably well. Some recent indicators such as retail sales and unemployment suggest the US, the locomotive of the world economy, is more resilient than feared. And although the world economy is expected to face several more tough months, hopes are growing that next year will show convincing signs of an upturn.

From their troughs on September 21, the S&P 500 has risen very nearly 20 per cent, and the FT Eurotop 300 has risen 26 per cent.

The danger is that the world has been starved of good economic news for so long that these positive indications have been interpreted with incautious enthusiasm. There is still plenty of evidence to suggest deepening gloom.

Whether or not you believe the world is in recession depends largely on what you mean by the word. The Organisation for Economic Co-operation and Development says it is, the IMF does not. But there can be no doubt that global growth this year, and very likely next year as well, will be the lowest in a decade at least. The world's three largest economies - the US, Japan and Germany - are all in recession, however you define it. Germany's performance, in particular, has been hugely disappointing this year.

For some countries, especially in Asia, recessions this year have been savage. Argentina is on the brink of financial chaos. And policy- makers' biggest headaches of recent years - imbalances in the US economy, reflected in the low level of private sector savings and huge current account deficit - have begun to improve only slowly.

The world economy is going through a painful period of readjustment from the boom of the 1990s. Despite the scraps of good news, and despite the decisive action to ease monetary policy in the US and to a lesser extent in Europe, the correction could still have some way further to run.

The story of how the boom went bust largely pre-dates September 11. The National Bureau of Economic Research in Washington, for example, has dated the beginning of the US recession as far back as March.

Although some industries such as travel and tourism, and the countries that depend heavily on those industries, have been very badly affected by the attacks and their consequences, the aggregate effect on the US economy appears to have been fairly modest.

By the beginning of September, however, the US was already sufficiently fragile that the loss of confidence and the disruption of activity following September 11 were enough to dispel any remaining doubt that the country was in recession for the first time in a decade.

In essence, the US and therefore the world economy have been through an investment cycle that would have been familiar to the Victorians. An investment boom, sparked by new technologies and new uses for old technologies, led to strong economic growth, rising profits and rising stock markets. But as excitement about future returns grew to unrealistic levels, investment became over-investment.

Too late, revised US data released in July showed that diminishing returns had set in long ago. Corporate profits as a share of national income peaked in the US in 1997 and fell from more than 12 per cent then to just 8 per cent in 2000.

But it was not until early 2000 that the exuberance began to fade. As interest rates rose in the US and in Europe to head off a looming inflationary threat, and oil prices soared, investors began to reassess whether their investments would really deliver the returns they had hoped for.

Stock markets began to fall - first the technology shares that had aroused the greatest excitement, then more generally. Business investment in the US slowed, and then this year plummeted. When US consumers began to worry about investments and jobs, consumption slowed too.

The slowdown spread round the world faster than expected. Because business investment is a particularly important source of demand for manufacturing output, the investment slowdown has hit manufacturing harder than other industries, especially in technology sectors such as electronic components and telecom equipment. And because manufactured goods are more likely to be traded internationally, world trade growth has collapsed.

Last year was the best for the growth of global trade volumes for at least 30 years with a rise of over 12 per cent. This year is likely to turn out to be the worst for 20 years, with growth of perhaps just 1 or 2 per cent. Countries, such as Singapore and Taiwan, which caught the high-tech wave turning themselves into subcontractors for US manufacturing, have been worst affected.

Those which have been less specialised, such as China, have fared better.

The great surprise, though, has been the severity of the slowdown in Europe. At the beginning of the year European policymakers looked at the low proportion of their gross domestic product earned from exports to the US 3 per cent in the case of Germany, for example and expressed confidence that their economies could ride out even a sharp slowdown in the US. This was to be "the hour of Europe", some said.

They reckoned without the links between countries operating in a globalised world that are often even more powerful than trade. Financial markets and business confidence in the US and in Europe have been closely synchronised throughout the recent cycle.

Germany's exports to the US have actually risen this year, but fixed investment has fallen, as the US's changing moods have been contagious.

Japan, meanwhile, has suffered from both falling trade and declining confidence. With orthodox fiscal and monetary policy both apparently now pushed as far as they can go, the country is mired in a political impasse that has prevented any of the proposed unorthodox remedies being adopted.

The world is now waiting for the US, which got everyone into this mess, to get us out of it. But in many respects the position of the US economy still seems precarious. The trade deficit is running at more than 4 per cent of national income, the household savings ratio is running at less than 3 per cent. Measures of stock market valuation related to earnings or physical assets suggest US equities are still significantly overpriced.

Even if these imbalances do not correct abruptly, which would cause the recession to lurch sickeningly down again, they seem set to ensure that the recovery will be stuttering and slow.