A year after the global economy fell off a precipice, we can take comfort that the extreme actions of governments and central banks have stabilised the financial system and brought about a sort of economic recovery.

Most big advanced economies have already turned around and the laggards, including the UK, will be among them soon.

However, although anti-cyclical and monetary reflation programmes are generating some short-term growth, they are irrelevant to the structural changes needed for a new expansion. Without these, this recovery is going nowhere.

This economic recovery is a bungee-jump. Our economies are bouncing from the depressed activity levels, triggered by the financial crash. Business sentiment, inventories and turnover are rising again and some consumer spending and housing indicators have picked up, too. The stronger recovery in leading emerging markets, especially in Asia, offers some limited hopes for higher Western exports. None of these, however, will take us back to sustainable and satisfactory growth.

Although the banking system is starting to heal, there is a long way to go before we have a functional banking system that allocates capital appropriately and intermediates credit freely.

Credit expansion, especially to small and medium-sized companies, is supply-impaired. More generally, there is little demand for credit, particularly from over-indebted households, and there will not be until economy-wide deleveraging is much further advanced.

Companies are under relentless pressure to contain labour costs and employment in a world in which the money value of GDP is falling, or barely growing. The baby-boomers who swelled the labour force in the last boom are on their way out, and are not being replaced by their smaller progeny. In the coming year, moreover, governments and central banks will be under growing pressure, rightly or wrongly, to withdraw or scale back their emergency programmes. As they do, new drags on the economy are inevitable.

In short, attempts to bounce our way back to the old precipice cannot succeed and we have to think about new economic strategies that will require commitment, patience and, above all, jobs.

Even though the US economy grew by 3.5 per cent per annum in the third quarter and may still be doing so, jobs are being lost. This might be typical of an economic cycle, but something more troublesome lurks. The unemployment rate rose in October to 10.2 per cent, its highest since 1982.

What matters, though, is what the Bureau of Labour Statistics, which keeps the best and most easily readable labour statistics anywhere, calls the U6 definition. This is total unemployment, plus those marginally attached to the labour force and those employed part-time for economic reasons. This rate has soared even faster to 17.5 per cent, its normal rate having fluctuated between 7 to 10 per cent, and it could easily top 20 per cent next year.

The British and eurozone labour markets display similar tendencies, even if deterioration has not been as rapid, thanks to wider employee retention arrangements and government subsidies to employers to sustain short-time work, respectively. Yet, like the United States, aggregate hours worked have fallen sharply, youth unemployment has soared — almost 20 per cent in the UK — and unemployment duration is at record levels.

The US teenage unemployment rate is now a record 27 per cent, while 5.6 million people have been unemployed for 27 weeks or more — more than twice the previous peak. These labour market characteristics are not so much lagging indicators as indicative of structural failure and potentially unpleasant economic and social risks.

The situation is serious, but not hopeless. Consider that in 1978 UK unemployment had topped 1.5 million, the economy was in disarray and economic and job prospects were grim, even without acknowledging the three million people who would boost the labour force by 2007. Yet employment surged after 1988. About five million jobs were created, with financial services gains offsetting four million manufacturing losses and the leisure, distribution, public administration, education, health and telecommunications sectors in strong supporting roles.

Somehow, we are going to have to do job creation all over again, but this time with financial services particularly, and the private sector generally, on the back foot.

In the US, healthcare reform is not even done yet and the Obama Administration’s efforts to promote green growth, a low-carbon economy and infrastructure development are barely out of the traps. Nevertheless, these sectors hold out strong potential for new jobs. Healthcare is not only a source of new jobs, per se, but can expand labour input as it embraces better the 50 million or so Americans who have no or inadequate healthcare coverage.

You can think of education and life-long worker training in the same way. Green growth and better transportation, energy and science infrastructure are “no-brainers”. Along with new bio- and nano-technologies, these will also spawn new manufacturing and energy products, processes, and jobs.

The State will have to offer leadership, example, and public funds, nowhere more so perhaps than in Europe, given the more adverse consequences of faster ageing, and a limited focus beyond banking sector populism.

As a matter of priority, labour taxes on employers should be reduced, strong efforts are needed to get young people back into work or training and the tax structure should be reformed to encourage older workers to stay on or return to work.

The conventional wisdom is that the fiscal capacity and credibility of the State has been exhausted, even before ageing society costs pile up. There is no question we have to address this in the interests of both financial stability, and our children.

However, have we become so myopic as to deny, first, that our growth model has broken down, and, second, that as a result public investment and economic leadership are essential to a new expansion in the economy and in employment?

The coming fiscal restructuring is unavoidable, but in the process, we must allow the State to initiate and support employment-centric structural change in the economy. The consequences of failure will be our own lost decade and problems that go far beyond the measurement of GDP.

• George Magnus is senior economic adviser, UBS Investment Bank

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