Politicians in America and Europe recoil from using the R-word. Gordon Brown and George Bush, together with their respective finance ministers and central bankers, still refer to a downturn or severe slowdown. Resort to the R-word is seen as the worst possible admission of policy failure and a political liability.

However, the president of the San Francisco Fed broke ranks last week to declare that the US economy appeared to be in a recession. She may be the first of many officials to do so.

Here in Britain, the Ernst & Young UK Item Club autumn forecast released today sees an economy that has deteriorated dramatically in the last quarter and is now in recession. Item is forecasting that the UK economy will contract for three further quarters before bottoming out in the second half of next year and expects a weak recovery in 2010. Gross Domestic Product (GDP) will fall by 1% next year, the first year of negative growth since 1992, and will grow by only 1% in 2010.

Peter Spencer, chief economist to the Ernst & Young UK Item Club, says: "We now have to face up to the reality of an economy that has been seriously weakened by recent dramatic events. The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy."

Newspapers and commentators are now making fairly free with the R-word. Indeed, some are increasingly referring to the period ahead as a slump and others as even a depression, to be considered alongside, if not as severe as, the US Great Depression starting in 1929.

The fact that markets have suffered severe falls and violent swings in the past week points to a mood of increasing apprehension among investors who fear we may be heading for a severe and prolonged recession, though are not sure whether the D-word is fully warranted yet.

The commonly accepted definition of a recession is two successive quarters of falling GDP. That seems clear enough. Unfortunately, it is not a very good definition, as recessions can range widely in severity and length. Sometimes economists talk of a "growth recession". This occurs when the economy, while operating below capacity, continues to grow but at a rate of expansion well below its potential.

Then there is a "technical recession". This is used to describe a situation where the economy can decline for two consecutive quarters but with few of the ill effects we normally associate with full-blown recession. A technical recession can also result from changes in economic measurement, or from revisions to published statistics which can render a period to have been in recession, with few aware of the fact at the time.

So there are recessions and recessions. Little wonder that economists such as Andrew Sentance of the Monetary Policy Committee have been critical of the standard definition, as it gives little help in comparing one recession with another.

In the US the task of calling the entry of the economy into recession, and its departure from it, is left to a body called the National Bureau of Economic Research. It has identified 10 recessions since 1945 and has yet to pronounce on the latest downturn.

Such a pronouncement may not be far off in the light of appalling data on the US economy last week. After holding up well in the first two quarters of the year, helped by interest rate cuts and the $600-per-head tax rebate in May, the evidence suggests that the world's biggest economy fell off a cliff in September. Figures last week showed the sharpest monthly decline in US industrial production since 1974 and the most marked month-on-month deterioration in the Philadelphia Fed's business conditions index since figures were first collated in 1968.

Making matters worse were new figures from the US housing market on Friday showing a sharper than expected fall in the number of new homes being built.

What is particularly worrying about these pointers is that the readings were taken before the latest plunges in financial markets.

So how serious is this slowdown turning out to be? Could we be heading for a depression? The boundaries between recession and depression are extremely unclear,

but economist Stephen Lewis of Monument Securities says there is general agreement that the word "depression" is only properly used where the performance of the economy gives grounds for especially serious anxiety.

Historically, there have only been two global depressions in modern times: the Long Depression of 1873-96 and the Great Depression of 1929-1938.

Between 1929 and 1930, US GDP fell by 8.6%. The economic condition of Japan between 1992 and 2003 also bears the characteristics of a depression. The weakness in output was pervasive, lasted several years and occasioned numerous fiscal stimulus packages. Japan's woes stemmed from structural weakness and was not amenable to treatment by the conventional means of fiscal and monetary policy measures. Indeed, interest rates were negative for much of the early period – just as they are now in America.

Matters might not be so gloomy in America but for growing evidence that the US is not alone in suffering a downward lurch in economic activity. Business surveys in Europe and Japan suggest that their economies are similarly on the slide.

A deceleration as sharp as that recorded for September is dangerous because it could be intensified by the blow to business confidence delivered by the massive global financial crisis of recent weeks. The danger is of a self-feeding spiral at work: financial markets react to evidence of a slowdown in the economy, shares lurch down further, suggesting to business and households that matters are going to get even worse, triggering more cutbacks in staff and on business investment and consumer spending.

The deep apprehension in markets is that policy responses so far are not working and the authorities may be close to running out of ammunition. Indeed, despite all those US rate cuts, the cost of external finance for most US companies – where credit is available – is higher now than at the onset of the crisis in August last year.

In a rapidly worsening economic environment, developments may now be beyond the abilities of the US Treasury and central bank to control. Much store is being placed on further rate cuts – the Fed is expected to cut by up to 1% later this month. If this fails to halt the slide in confidence, we may well be destined for 'R' morphing into 'D', with a downturn lasting well beyond 2009.