There are moments in the financial markets when, abruptly, the conventional wisdom among investors about where the global economy is, and where it is headed, gets severely disrupted. Last week was one of those moments.

All at once, a raft of preconceptions about the state of the world economy and its prospects was thrown into a state of flux, sparking seismic upheavals across the financial markets.

The catalyst for last week's drama was the realisation that the outlook for key industrial nations, and the global economy as a whole, had become much darker than previously imagined.

A double whammy of bleak news came from the eurozone and from Japan, with official figures revealing that both economies shrank in the second quarter.

The figures shattered the misplaced assumption by many participants that the worst of the financial and economic trauma besetting America and Britain could remain largely confined to the Anglo-Saxon world. The entire developed world was shown to be teetering on the brink of recession.

Developments in the eurozone most disrupted the slightly complacent consensus in the markets. An admission earlier this month by Jean-Claude Trichet, the President of the European Central Bank, that the eurozone had been caught out by the pace of deterioration in conditions in the 15-nation bloc had caused some concern among investors. However, Thursday's confirmation that gross domestic product (GDP) in the eurozone economy had fallen in the second quarter by 0.2 per cent, its first contraction since the inception of the single currency in 1999, forced many investors into a drastic reappraisal.

With the eurozone's annual growth rate also cut to an anaemic three-year low of 1.5 per cent - less than half the pace set 18 months ago - the illusion that Europe could remain if not immune then at least substantially insulated from the economic woes afflicting the United States in the wake of the credit crisis was destroyed.

The big question now confronting the markets and policymakers is how much worse things in the eurozone might become.

The optimists among investors appeared to be determined last week to cling to the few remaining grains of comfort.

Hopes were pinned on the possibility that the decline in GDP might in part reflect “payback” for the bloc's full-blooded 0.7 per cent expansion in the previous three months, which was markedly stronger than anticipated.

There is some evidence in Germany, at least, where the economy contracted by a painful 0.5 per cent in the second quarter, that the period was, indeed, weak as one-off factors that boosted performance in the previous three months unwound.

In particular, exceptionally warm weather is thought to have boosted investment spending in the first quarter, when this surged by 3.7 per cent. This was helped on its way by a scramble by companies to escape adverse tax changes on accounting for depreciation.

As Capital Economics notes, this made it inevitable that investment would drop back sharply in the second quarter and would drag overall growth down with it.

Yet while these and some other caveats are valid as far as they go, they are, in reality, to clutch at straws.

Unfortunately, it seems all too apparent that, while Germany's fortunes look less fragile than those of some of its neighbours, the eurozone economy as a whole is increasingly frail.

A slew of indicators regarded as reliable guides to the evolving trend in the eurozone suggests that the bloc is almost certainly embarked on a severe and protracted downturn.

In recent weeks, key barometers of business confidence plunged alongside purchasing managers' gauges of present conditions in the eurozone's manufacturing and services sectors.

Activity across much of the bloc is faltering as the economy is buffeted by a further tightening in lending conditions induced by the credit crunch, the squeeze on households' and businesses' finances from soaring food and energy costs and a toll on exports from the continuing strength of the euro - despite the dollar's recent resurgence.

The impact is clear from individual national economies.

In France, growth in consumer spending in the second quarter tumbled to its lowest levels in a decade at only 0.1 per cent, fuelling a much worse than expected 0.3 per cent drop in GDP in the period.

In Italy, GDP also shrank by 0.3 per cent in the period and worse still is expected to follow.

In Spain, unemployment is soaring and growth in the second quarter tumbled to a 15-year low of only 0.1 per cent, as the country's housing boom implodes, leading to ministers being summoned back from summer holidays to agree emergency measures.

Less widely recognised is the financial fragility of much of the eurozone's corporate sector, which leaves many businesses badly placed to weather the gathering storm and which is highlighted by Michael Saunders, of Citigroup, in his latest analysis.

Mr Saunders points to figures showing that the gap between eurozone non-financial companies' spending - including investment and interest costs - and their profits is in deficit to the tune of 4.6per cent of value added: the worst figure since early 2001.

Although, on these measures, German companies are still in surplus, the deficit for Italian businesses last year was 7.4 per cent, the highest since 1992; French companies were in the red by 8.2 per cent, the highest since 1982; and the deficit for Spanish companies was an unprecedented 18.6 per cent.

All of this leaves eurozone businesses exposed, and likely to severely retrench, if the deepening downturn further undercuts profitability.

Already, about two thirds of revisions to eurozone companies' profit forecasts during the first half of the year saw expectations downgraded. It is difficult to escape the conclusion that the eurozone is confronting a slump that very likely will prove to be deeper and more prolonged than many had, until now, expected.

Where, then, does this leave the global outlook? Unquestionably, Europe's plight makes prospects look still more precarious.

Yet the reappraisal that last week's shocks forced upon the markets offered at least a glimmer of hope, sending the sky-high prices of oil and other commodities plummeting.

A continued retreat by commodity prices would offer at least some chance of a limit to the scale of the global downturn that is now clearly taking hold.

It is clear, though, that a tipping point looms.

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