The recession may be over, but the number without work won't stop rising

The early signs of the economic recovery are too muted to result in strong job creation, writes Richard Northedge

The recession is over, but not the pain. It may seem an economic paradox, but when economies resume growth, unemployment keeps on rising relentlessly, possibly for years. It is as though the war is over but austerity and rationing remain.

Mervyn King, the Governor of the Bank of England, said last week that Britain has joined Germany and France in emerging from recession, while Ben Bernanke, the chairman of the US Federal Reserve, declared that America's slump has probably ended, too. But figures last week showed UK unemployment rising to almost 2.5 million in the three months to July, the highest level since 1995.

Vicky Redwood, an economist at Capital Economics, says: "We see unemployment rising to about three million – possibly a bit higher – and it won't peak until the end of next year or 2011. Unemployment tends to keep rising until the economy is back to its trend rate."

Even more pessimistic, the TUC is predicting a figure of more than four million jobless. In Liverpool last week for the annual TUC congress, the general secretary, Brendan Barber, warned that the last time unemployment was so high there was rioting on the streets.

After the recessions of the 1980s and 1990s officially ended, it was years before employment returned to pre-slump levels – with unemployment continuing to increase for between 18 months and three years.

During such times, job cuts become a way of life, not only for many families, but for companies. Firms not only reduce their workforces because of lower business activity, but also to reduce the excess and inefficient manning accumulated in boom years. Businesses that tolerated overmanning because they have fat margins or to avoid confrontation with unions use recessions as an excuse to reorganise.

Once large corporations start cutting staff, others will follow with little opposition. If there are negotiations at all, they are about job numbers, not about whether to cut. It is this prospect of businesses emerging leaner and fitter for the recovery that partly explains the current surge in share prices.

However, those lost jobs are permanent losses: even when business levels recover, companies will not return to old manning levels. The Organisation for Economic Co-operation & Development forecast last week that, worldwide, 25 million jobs could be lost because of the global slowdown – roughly one job in a 100 across the planet.

Angel Gurria, the OECD's Secretary General, says: "Unemployment is the bottom line in the current crisis. Despite early signs of economic recovery, in most countries, unemployment will rise further next year and remain high for the immediate future."

As for Britain, he adds: "Despite signs of the recession slowing or even ending, the early stages of the economic recovery are likely to be too muted to result in strong job creation. As a result, the unemployment rate, now 7.9 per cent, is expected to rise in the coming months and to remain at a high level through 2010."

A three million jobless total would take the UK unemployment rate to 10 per cent, but many other major countries are faring far worse. The US and France are already at about 10 per cent, Ireland is over 12 per cent and almost one in five working-age Spaniards are without jobs. Britain's jobless rate is below the average of the EU, the 30 OECD countries and the G7.

But there are British blackspots where the unemployment rate is already well above 10 per cent, for example in major cities such as Leicester and Birmingham. Regionally, the North-east is hardest hit while the South-west, with a rate still below 5 per cent, has the least unemployment.

But the biggest differences are not by geography but by age: while the UK's overall unemployment rate rose by 2.3 percentage points over the past year, the increase for 18- to 24-year-olds was double that and for 16- or 17-year-olds the jump was 8.3 per cent. There are now 947,000 people aged 16-24 without jobs – one in five of those seeking work: that is already the highest figure since records began in 1992 and could reach one million by Christmas.

The expansion of training schemes and higher education prevent youth unemployment being much higher, but that merely postpones the employment problem. With major companies such as BT suspending graduate recruitment, jobs are harder to obtain, even for university leavers.

The result is that graduates are taking jobs previously performed by those with only A-levels and A-level students are forced to take jobs they could have got after taking GCSEs. This leads to those with few qualifications bearing the brunt of unemployment. The risk is that this age group becomes a lost generation that fails to get on to the first step of a career ladder.

Recessions hit some employment sectors harder than others, and the main victims this time are in construction – another 61,000 jobs lost in the latest three months – and financial and business services, where 67,000 more jobs went. Lloyds has lost 7,500 jobs since the HBOS merger but plans thousands more. And while supermarkets continue to recruit, a high-street cull is feared as hard-pressed retailers belatedly rationalise.

But while the 1990s recession was largely a private-sector slump, the certainty of public-sector spending cuts will ensure the jobless total keeps rising despite this recession ending. The Prime Minister told the TUC last week that he would protect jobs rather than make deep cuts but few think that is possible – or that it will be his call.

Mr Barber points out that a 10 per cent cull of public-sector staff would mean 700,000 lost jobs and calculates spending cuts could raise the jobless rate to 40 per cent in towns such as Middlesbrough, Leicester and Liverpool where unemployment is already high.

The Government may have rejected the recent McKinsey report calling for 137,000 NHS job cuts, but losses are inevitable both there and in the Civil Service. However, public-spending cuts will also hurt private companies dependent on state contracts, including defence suppliers. Last week, BAE Systems announced more than 1,100 job losses and the closure of its Cheshire plant when production of the Nimrod plane is completed.

Ms Redwood says: "Anyone who receives public money is vulnerable but outsourcing companies might gain."

When unemployment rises, it is not just the 10 per cent without work who consume less but the perhaps 20 or 30 per cent who fear for their jobs. That helps explain the paradox whereby people become jobless despite the slump ending. But as the rise in unemployment slows and it becomes clearer which jobs seem safe, the pessimists turn into optimists and resume spending, helping fuel the recovery.

The Employment minister, Jim Knight, acknowledges the apparent inconsistency, saying: "Unemployment is likely to keep increasing even once the economy starts growing again."