The UK’s economy, unlike its inspirational Olympic team, has recently been unable to match the performance of most other developed countries. In the past two years, after allowing for the under-recording of growth in the official data, real gross domestic product has been little better than flat at a time when a strong recovery would normally have been expected. So what has gone wrong and what should be done about it?

The first issue is whether the growth shortfall has been due mainly to demand-side or supply-side factors. Sir Mervyn King, governor of the Bank of England, has pointed to the demand side, arguing that the crisis in the eurozone and the rise in commodity prices has depressed private sector demand, while the reduction in public spending has actually occurred slightly faster than the coalition government originally planned in 2010. Aggregate demand has been far weaker than I expected this year and that has been primarily responsible for the absence of growth. Essentially, an aggressively easy monetary stance has not been sufficient to offset the impact of fiscal tightening, and the twin external shocks from oil and the euro crisis.

However, it is also clear that the supply side of the economy has deteriorated in ways that are not yet understood. Further evidence of this emerged this week with the downward revisions to the Bank’s medium-term GDP growth forecasts, while inflation projections were left broadly unchanged. The private sector is employing more workers than would have been expected.