More good news for the economy with the purchasing managers' index for the service sector up from 54 in December to 56 in January, a 10-month high.

This is what Markit said:

"The UK service sector started 2012 in positive fashion with activity and new business both rising at marked and accelerated rates. Business confidence showed the largest one-month gain in the survey history, while employment was increased to the greatest degree in nearly four years.

"On the price front, input cost inflation eased to the lowest for 14 months while output charges were again little changed.

"January’s headline Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – improved to a 10-month peak of 56.0. That was a rise from 54.0 in December and represented a third consecutive monthly improvement in the index (the best run for over two years)."

The purchasing managers' index for manufacturing in January is strong and, in the circumstances, rather surprising. The index rose from 49.7 in December to 52.1 in January, pointing clearly to a resumption of the sector's expansion. Adding to the good news was the sharpest fall in input prices for more than two years. Maybe we wrote manufacturing off too soon.

This was Markit's verdict: "The UK manufacturing sector started 2012 on a positive footing. Output expanded at the fastest pace since last March, new orders rose following a period of contraction and payroll numbers stabilised. Cost pressures continued to ease, as average input prices fell for the third straight month."

Jonathan Portes of the National Institute of Economic and Social Research asked me what I meant by 'Keynesian'. Jonathan's post is here, and there is an interesting one here from Simon Wren-Lewis. This is what I said:

The National Institute was founded in 1938, so I suppose strictly speaking "taking its back to its Keynesian roots" implies taking it back to the economics of Keynes, rather than post-war Keynesian economics, which David Colander many years ago described as Lernerian rather than Keynesian.

What is Keynesian economics? In Britain it was common to think of it as the 1950s and 1960s belief in fiscal fine-tuning, and the primacy of fiscal over monetary policy, buried in the 1970s by stagflation and the rise of monetarism, and encapsulated in the Jim Callaghan/Peter Jay 1976 speech to the Labour party conference.

What it means now is more difficult. Paul Samuelson famously wrote that all economists should think of themselves as post-Keynesians, "keen to render obsolete any theories that cannot meet the test of experience".

Do only Keynesians support an emergency fiscal stimulus in a crisis and deep recession? No. Robert Lucas was half -joking when he said he guessed everybody was a Keynesian in a foxhole, and it is true that some US economists were opposed. But support for the stimulus was pretty universal among the economic mainstream.

The IMF was criticised by some in the emerging world for abandoning the Washington orthodoxy, in which its standard prescription for developing economies in difficulty was fiscal austerity. Instead it supported a temporary fiscal stimulus, though with the proviso that countries should also put in place credible medium-term fiscal consolidation plans.

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In all likelihood, the 0.2% fall in GDP announced by the Office for National Statistics (ONS) last week will be revised away in time. There were, as there always are, some special factors.

The second mildest autumn in more than 350 years produced a drop of over 4% in gas and electricity output, as well as making it hard for retailers to sell winter woollies and overcoats. A one-day strike by public sector workers on November 30 probably hit GDP, though the official statisticians do not know by how much.

I am not pretending that these were anything but disappointing figures, though there was some relief in the Treasury that they were not even worse. One official recalled what happened a year ago, when everybody was expecting a 0.5% GDP rise for the final quarter of 2010, only for the ONS to report a 0.5% fall. The recovery has been struggling ever since.

The 0.2% fall in fourth-quarter GDP did not change the overall numbers for 2011, which showed 0.9% growth, in line with the late-November projection by the government’s Office for Budget Responsibility. Non-oil GDP, resorting to a distinction that used to be made in the days of booming North Sea output, rose by a slightly stronger 1.4%. The economy has flattened, not dived.

But it was the 0.2% fall that did the damage and, unlike a year ago, there is no automatic reason to expect a bounce in the current quarter. Things are likely to remain flat for a while.

In the headlines and in broadcasts, there is no distinction between a small fall in a flat economy and, say, a 2% drop that would imply a deep recession. People read or hear about the fall, assume the economy is slumping, and their confidence takes another hit.

The 0.2% drop in gross domestic product inn the fourth quarter of 2011 was disappointing, but probably no more than that. It did not change estimates for growth in 2011 of 0.9% (1.4% excluding North Sea oil and gas) and was broadly in line with expectations.

The service sector was flat in the fourth quarter, which looks to be a number likely to be revised upwards looking at the surveys, while industrial production was down by 1.2%. Included in this was a huge quarterly fall, 4.1%, in electricity and gas supply, reflecting the mild weather.

Given this, the possible effects of the November 30 public sector strike and the likely upward revision of these figures when more data comes in, we should not worry too much about these figures, which are here.

This is particularly the case when you look at an upbeat CBI manufacturing survey, the highlight of which was: "In the next three months, manufacturers expect output to rise modestly, with a balance of +15%." If manufacturing avoids a drop in the first quarter of 2012, so will the wider economy.

The Bank of England's minutes showed a unanimous vote in favour of unchanged policy, and an interesting debate:

"For some members, the risks of undershooting the target meant that a further expansion of asset purchases was likely to be required. Some of those members also noted a downside risk to inflation arising from the possibility that the reduction in the economy’s supply potential following the recession had been less, and hence spare capacity greater, than assumed in the Inflation Report. But there was no compelling need to increase the scale of the programme of asset purchases before completing those already announced.

"For other members, the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term. Annualised three-month inflation rates were still above the target. Looking ahead, particular concerns included: the risk of price pressures from firms seeking to increase margins; and the fact that even if wage growth were to remain subdued, wages might add to inflationary pressures if productivity growth were also weak."

More QE is likely in February but by no means guaranteed. The minutes are here.

The International Monetary Fund has revised down its growth forecast for 2012 to 3.3%, from 4% in September, and its 2013 forecast from 4.5% to 3.9%. To be fair, its earlier forecasts looked a little rosy, though the global economy grew by a very impressive 5.2% in 2010 before slowing to 3.8% in 2011.

According to the IMF: "The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated.

"Global output is projected to expand by 3¼ percent in 2012 —a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO). This is largely because the euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation."

It predicts that Britain will grow by 0.6% in 2012, a downward revision from 1.6% in September. There will be a debate over this: "In the near term, sufficient fiscal adjustment is in motion in most advanced economies. Countries should let automatic stabilizers operate freely for as long as they can readily finance higher deficits. Among those countries, those with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation."

The update is here

Public sector net borrowing was £13.7 billion last month, down from £15.9 billion a year earlier. The current budget deficit was £10.8 billion, down from £13.3 billion in December 2010. Upward revisions to earlier data mean that cumulative borrowing for the first nine months of the fiscal year, £103.3 billion, was below the £114.6 billion recorded in the corresponding period of 2010-11. So borrowing will be lower this year, but the difference will not be massive.

Will it undershoot the Office for Budget Responsibility's revised borrowing figure of £127 billion for the current fiscal year? I think so, and I thought the upward revision from £122 billion in November was unnecessary. But we'll see. The OBR's analysis, here, points out that borrowing will need to be £2.3 billion higher than a year earlier for the final three months for the target to be hit. It expects government spending to come in stronger and VAT and bonus-related taxes to be weaker.

The Office for National Statistics highlighted the fact that public sector net debt rose above £1 trillion for the first time.

Jonathan Portes, director of the National Institute of Economic and Social Research (Niesr), has published a lively rejoinder to my piece yesterday on his blog, here, in which he suggests I tie myself "up in all sorts of knots".

Jonathan's also a bit sensitive about my suggestion that he has taken Niesr back to its Keynesian roots: he says he doesn't really think of himself as a Keynesian and hasn't changed its policy position. The argument I set out on Sunday was, I thought, very straightforward.

If you thought Britain's very low gilt yields were "just as in Japan — a sign of economic failure, not success", as Jonathan originally wrote, then you would expect that the markets were anticipating a long period of economic stagnation and deflation for Britain, as in Japan. They are not, and neither is the National Institute, barring a very big change in its forecasts in the next week or so.

The markets do expect Bank rate to stay low, as he says, but that is rather a different point. The Bank of England, and other central banks, have decided that the appropriate response to the aftermath of a banking crisis is to keep official interest rates low, and the expectation is that they will continue to do so even as the recovery strengthens. One of the arguments for doing so in Britain, of course, is that fiscal policy is being tightened. I'm not at all sure this is a sign of economic failure, merely a reflection of banking and financial conditions. Sir Mervyn King has made clear that a key factor keeping rates low is the health (or lack of it) of the banking system.

This, by the way, is in contrast to the response of the Japanese authorities. Zero rates only came in in Japan once deflation had taken hold. The response of the Bank of Japan to the bursting of its bubble economy two decades ago was to raise interest rates, not lower them. It was one of the lessons we have learned from the Japanese experience.

Why shouldn't the government take advantage of low gilt yields and borrow to stimulate the economy, as Jonathan suggests? Because, in my view, these things are a lot more finely-balanced than he allows. A Plan B fiscal stimulus would be seen by the markets and the ratings agencies as a powerful indication that the government was giving up on its fiscal strategy. Given how close the government came to breaking its fiscal rules in the Autumn Statement, it is hard to see the Office for Budget Responsibility looking benignly on any such policy shift. You can argue that none of this matters. In the real world, however, it does.

So, there should be no confusion. And if you want to draw a comparison with another country that has low government bond yields, why not Germany?

PS Jonathan has responded to my response on his website and appears to not know the difference between short-term and long-term interest rates. Very strange. My point was that, even if you accept his explanation for very low rates - that Bank rate will stay low - this does not imply Japanese-style stagnation and deflation. And it is perfectly possible for a country to have a low policy rate but very high government bond yields. Look at several eurozone members. Britain's low gilt yields reflect, as he has conceded, market confidence in the credibility of the government's fiscal plans.