By Michael Baxter, economics writer

Once again the UK saw contraction. UK output declined by 0.3 per cent in Q4 last year, say the statisticians. It is not in recession, not yet – by the technical definition, anyway. But it may be soon. Yet UK employment is at an all-time high.

Some economists say that this is not possible. How can the economy shrink and employ more people at the same time?

Well, there are some possible explanations.

Explanation number one is that the data is wrong. Optimists say official stats on the UK economy are understating the truth. Well, maybe.

If in doubt consult the surveys. The most reliable of the surveys are probably the Purchasing Managers’ Indices (PMIs) covering UK manufacturing, construction and services.

You may recall that the UK supposedly suffered a recession at the tail end of 2011 and in the first six months of 2012.

But the PMIs pointed to mild growth. Don’t take this too far. The PMIs weren’t predicting strong growth – they were still pretty bad – they just weren’t pointing to recession.

Well, the latest PMIs are not so good. In fact they are worse than this time last year when the UK was supposed to be in recession, so that’s not very encouraging.

Maybe the problem is that employers are hanging onto labour. They are cutting wages perhaps, but not firing; fearing that it will be too hard to recruit once the recovery begins.

Maybe, but are you convinced by that argument? Do employers really think a recovery is around the corner?

The Bank of England has suggested the problem is lack of funding. They say that companies, especially smaller ones, are being starved of the cash they need to invest, so in the absence of being able to invest in equipment they hire more staff. That is cheaper than investing in the short run, but more expensive in the long run. In short, when times are hard and cash is short, you can’t always do the things you want to do.

That may be right.

Here is another theory. Perhaps the real problem is that the City is more productive, at least on paper, than manufacturing. As the UK becomes less reliant on the City, and more people work in other sectors, we inevitably see less output from more people. Or maybe all that growth we had in the noughties was illusionary. We are seeing less output for more people simply because all that GDP built on hot air has gone.

But here is an observation. We all know of graduates working for the minimum wage. Highly qualified people are doing unskilled work.

It is not just graduates from minor universities, even graduates with good degrees in respected subjects and from leading universities are struggling.

There is nothing wrong with working in a coffee shop or fast food chain, but it does seem to be a waste of a first or 2:1 in a solid academic discipline.

There are jobs there. But are they jobs the UK needs?