Shrinking no more

The British media are always quick to wheel out entirely false headlines such as "Rail strike costing economy £500 million a day!". So it was a teensy bit inconsistent when they all rushed to pooh-pooh data that suggested that the worst December weather in a century had caused the reported 0.5% fall in GDP. No, no no, said the media, egged on by Shadow Chancellor Ed Balls -- this is the start of the dreaded double dip. We're doomed to fall behind even as the rest of the world merrily expands.

Well, this week we have seen the release of some of the earliest data for the month of January -- the Markit/CIPS purchasing managers' indices (PMIs). Guess what? The manufacturing PMI rose to 62, its strongest level in 19 years, and the construction PMI also rebounded. No huge surprises there, perhaps: manufacturing has been doing nicely thanks to the weak exchange rate (even in December the reading was a strongly-expansionary 58), while construction was certainly the sector worst affected by the weather and hence the likeliest to bounce back. But what's this?? Today we learn that the dominant service sector, which has had the last rites recited over it regularly since about mid-2010, saw its PMI bounce back to 54.5 in January, the strongest reading since last May.

So whaddaya know? The ONS (and George Osborne) may well have been right all along, and the media wrong. In fact, I'd be tempted to go further. Think about it. Simple arithmetic suggests that each day of a quarter accounts, om average, for about 1.1% of that quarter's GDP. Let's call it 1% for simplicity's sake. So if the economy shut down completely for a day during a quarter, GDP for that quarter would be 1% lower. The ONS's estimate, then, implies that almost a month of very widespread disruption caused the loss of only half a day's output. Although such losses are almost always recouped once conditions return to normal, the fact that the worst of the disruption took place just before Christmas means that this rebound could not have taken place during Q4. The bottom line is that underlying growth in Q4 was probably stronger than estimated, which implies that the recovery evidently under way in the current quarter is starting from a slightly higher base.

The Q4 GDP data attracted screaming headlines on the front pages of the papers. Let's see whether this better news gets the same treatment. Holding your breath is not advised.