Jeremy Warner: Britain's long road back to prosperity As has long been apparent, this is no ordinary, cyclical recession, in which, after a short sharp shock, the economy rapidly reboots and returns to trend growth. This time really is different; already, it looks much more like an outright depression, defined by John Maynard Keynes as "a chronic condition of sub-normal activity for a considerable period, without any marked tendency either towards recovery or towards complete collapse." GDP figures to be announced next week are expected to confirm a third successive quarter of economic contraction. To call this a "double dip" is again something of a misnomer, for it implies a meaningful recovery in between. As far as Britain is concerned, there wasn't one of any significance. Nearly four years after the collapse of Lehman Brothers, the UK economy remains some 4pc smaller than its pre-crisis peak. Put another way, it is some 14pc below the level it would have attained had growth continued at the pace seen before the banking crisis. That's an almost unprecedented loss of potential output. Some advanced economies have done better - notably Germany and other big exporters sustained by booming emerging market demand - but many have done even worse. For all, previous assumptions about the onwards march of economic advancement have been shattered. In terms of social deprivation, today's implosion doesn't yet come anywhere close to the Great Depression of the inter-war years but, for the UK at least, it is already deeper and longer as far as the hard data on national output is concerned. What is more, the UK has markedly lagged other G7 nations in climbing back from the post-Lehman slump. The distinguishing feature here is domestic consumption, which has failed to recover in quite the same way as elsewhere. Business investment has also remained deep in the doldrums, at less than half its pre-crisis levels. It's not all doom and gloom. Remarkably, the jobs market has remained relatively resilient, given the scale and length of the downturn. Unemployment hasn't risen anything like as much as in the recession of the early 1980s, when it rose above 10pc and then stayed there for more than five years. This time around, the jobless rate has plateaued at 8.2pc. In the past two years, around 850,000 new private sector jobs have been created, leading some to query the integrity of the GDP figures. Could it be that economic performance isn't quite as bad as the official data suggest? GDP estimates are frequently revised upwards, but this would have to happen on an unprecedented scale to explain the differences in labour market performance. So what's up? Partly it's down to labour hoarding and wage restraint. During the slump there was a sense in which "your pay rise this year is being spent on keeping your job." Some workforces even agreed pay cuts as an alternative to deeper job losses. But, although the UK has avoided, so far at least, the mass unemployment of previous recessions, the damage to demand is pretty much the same. With inflation high but wages subdued, disposable incomes have been badly hit, further dampening consumption already constrained by excessive levels of household debt. Big changes in the structure of the labour market have also played a role in supporting jobs. In past post-war recessions, manufacturing and construction have taken the brunt of the job losses but these sectors are now much smaller than they were. Service industries are significantly bigger. The other big factor is public policy. Normally, recessions are caused by the central bank clamping down on excessive demand and inflation with higher interest rates, causing large numbers of firms to become insolvent. This time around, the opposite has occurred. Very low interest rates have enabled many more firms to stay afloat than is traditionally the case in downturns. Having cut back on investment, many companies find themselves flush with cash, which has in turn further eased the pressure for restructuring. In past recessions, factories would be shut wholesale but this hasn't really happened this time, in part because of continued strong demand from emerging markets. High-end manufacturers such as Jaguar Land Rover have been expanding like Topsy. Again, this time it's different. Manufacturing is usually shredded in a recession but it has weathered this storm relatively well. Countries strong in exports, such as Germany and Sweden, have hardly felt the downturn at all. Looking at where the new jobs are coming from, they have tended to be in quite low level business services, such as office cleaning and call centres or, alternatively, in self-employment, catering, hotels and so on. These jobs are not to be sneezed at but they are not the stuff on which a vibrant economic future is built. The structural shift in employment which Britain needs in order to become a more balanced, competitive economy is not yet happening on anything like the scale required. Just as worrying, ultra-loose monetary policy has helped sustain a growing legion of "zombie" households and companies with unsustainably high debts. Forbearance is at record levels, in part because banks are too weak and capital constrained to allow for the necessary loan impairment. Neither alive nor fully dead, these zombie debtors are unable to provide demand in terms of either consumption or investment. So what lies at the heart of the problem? Is it lack of demand or lack of supply? Why has there been so little productivity growth? How much spare capacity has the economic contraction created and what's the scope for a bounce back in output, if any? My guess is that much of the growth of the later Brown years was just financial services, government spending and housing market froth. This won't be coming back any time soon. You cannot have a balance-sheet recession as serious as this one and expect that, with a little bit of tweaking and requisite demand management, the economy will bounce back and everything will return to the way it was before. The Government may be powerless to induce growth, but it can set policy to enable it. On this front, it has failed miserably. Despite the evident and urgent need for sweeping infrastructure and energy renewal, policy seems mired in piecemeal, needs-must, muddling-through solutions. The Government's nuclear strategy is in disarray, its renewables policy is being progressively axed and ministers cannot even come to any conclusions on how to expand airport capacity for London and the South East. It is always easier to say what should not be done than what should. Labour calls for an immediate fiscal stimulus in terms of tax cuts and spending increases offer no more than short-term relief, while risking the disaster of an adverse reaction in bond markets. There are few things more guaranteed to tip the country into abject ruin than a pronounced rise in interest rates. Nevertheless, the Government has given itself wriggle room by setting out and so far enacting a clear strategy for reducing the deficit, about the only thing the Coalition has got right over the past two years. In circumstances where the eurozone crisis gets much worse, threatening a second credit crunch and mass unemployment, there may be a case for unfunded, emergency tax cuts and spending initiatives. Expansionary demand management policies have not worked well in the past for Britain, as evidenced by both the Lawson and the Brown booms. But failure adequately to support demand also carries risks. The longer demand deficiency persists, the more likely it is that supply would be impaired, as investment falters, skills deplete and animal spirits fade. The Government must urgently shift the log jam in its national infrastructure plan and get some of these projects moving with dispatch. It is extraordinary that so much of what was promised continues to sit impotently in ministers' in-boxes awaiting a decision. Attempts to harness Britain's immense pension fund wealth to infrastructure investment have fallen well short of what's required. The Private Finance Initiative has been politically discredited, while no viable alternative mechanism for getting private money into infrastructure has so far been set out. In a clear sign of market failure, the private sector is not providing the affordable and social housing the country obviously needs. The Government has announced a series of indemnifying schemes to encourage new building but these have achieved only limited success. If the private sector cannot be persuaded to take the risk, then the Government must make room in its budgets to do so instead. A national programme of house building would create work, cater for an obvious social need and ultimately pay for itself. "Funding for lending" provides a welcome way of getting the benefits of cheap credit through to the real economy, unlike quantitative easing, whose positive impact on demand and growth remains questionable. But it fails to deal with the root of the problem, which is the great mass of bad loans that continue to sit, unrecognised, on bank balance sheets. Liquidity is no longer the issue; the banking system is swimming in it. But solvency has not yet been properly addressed. Banks are not going to start operating properly again until they have been purged of the legacy of bad debts. A bad bank needs to be created to take these debts off balance sheets at market prices and put them into state managed, long term run-off.This would force the pace of write-downs on housing and commercial property so that prices can be allowed to adjust to more realistic levels. One of the biggest constraints on demand is excessive household debt. Some form of generalised debt forgiveness might be contemplated to reduce negative equity and get households spending again. The squeeze on local authority spending has gone too far, at great cost to local jobs and business. Some way of substantially easing this squeeze needs to be found, funded if necessary through further cuts in welfare and overseas aid. Excessive employment regulation continues to be cited by many small and medium-sized enterprises as the biggest single barrier to investment and job creation. Fuller implementation of the Beecroft report on employment liberalisation would go some way to addressing these supply side concerns. Anti-banker rhetoric has reached a hysterical pitch which is doing real harm to Britain's reputation as a place to do business. This is fast transmogrifying into more generalised, anti-business sentiment which threatens the inward investment Britain desperately needs for jobs and growth. Much banking reform, well intentioned though it might be, has become counter-productive, adding to deleveraging pressures and further increasing the cost of credit. Calls for a state-owned bank to provide long-term credit for infrastructure and business development may have some merit but it is important that governments do not become involved in credit allocation or attempting to pick winners. Historically, politicians seem to have been good only at picking losers. Few of these proposals would produce immediate results but, backed by meaningful reform in education and vocational training, they might go some way to restoring business and economic confidence. One thing is for sure: policy as it stands is proving almost completely ineffectual. It is time for more radical solutions.