Source: The Canadian Press

The global recovery is so fragile that many industrialized countries may need more government stimulus rather than an exit strategy to rein in deficits, the Bank of Montreal said Thursday.

In the wake of a week of negative economic news all pointing to a stalling recovery, the bank says many economies, and particularly the United States, should put fiscal restraint on the back burner for now.

Even in Canada, where the situation is not as dire, governments should not be adamant that next March will mark the end of stimulus spending, the bank says.

“The wrong diagnoses at this point could lead economic policy-makers astray with potentially disastrous consequences,” BMO deputy chief economist Douglas Porter wrote in a report.

“The long-term fiscal cost from a lengthy period of subpar growth would be much more damaging than a small down payment now — a stitch in time saves nine.”

After a strong initial rebound from recession beginning last fall, both the U.S. and Canadian economies have slowed sharply. Europe, as a whole, has shown almost no growth, although some countries are in recovery.

Last Friday, Canada and the U.S. reported a retreat from employment gains, and on Wednesday, both said their trade deficits ballooned in June.

The weakness appears to be more evident by the day. The U.S. said Thursday initial jobless claims rose to the highest level since February last week to 484,000, when analysts had been predicting a drop.

And in Canada, the Conference Board said its outlook for corporate profitability softened again in July by 0.4%.

Markets were down again Thursday after a big drop the previous day.

Porter said he is not predicting a double-dip recession, although he is not ruling it out either, but added that given how quickly economies are pulling back from the initial spurt, more government spending is likely needed to avoid a loss of confidence by investors and consumers.

Even in Canada, where the risk of a double-dip is less, governments should keep options open and adopt a wait-and-see approach to whether more stimulus is needed.

“I’m certainly not advocating every government here should open up the taps yet, but I don’t think every government in this country should assume stimulus should come to an abrupt stop on April 1, 2011,” he said.

Canadian Auto Workers economist Jim Stanford said that, at the very least, Finance Minister Jim Flaherty should extend the expanded employment insurance provisions beyond next spring, and allow delayed infrastructure projects to be completed beyond March 31.

Last week, budget watchdog Kevin Page said as much as $500 million of Ottawa’s $4-billion infrastructure stimulus could be left on the table because of delays in getting projects started. The Federation of Canadian Municipalities called for an extension, but as yet Ottawa has not given an indication it will budge.

Porter says there is a big misconception about government stimulus, including criticism that it hasn’t worked and that it has reached unsustainable levels.

Fiscal stimulus has proven ineffective in the United States, he said, but mainly because it hasn’t been tried. Washington’s $787 billion so-called “Obama package” has been largely offset by cutbacks at the state and local levels, he said, noting that while governments were supposedly beefing up the economy and employment, 243,000 public sector jobs vanished over the past year.

In Canada, both Ottawa and provincial governments acted in consort and the stimulus worked to keep the economy from falling further. But he noted that total government contribution in the past year was more modest than advertised, accounting for about 1% of gross domestic product more than in previous years.

And Porter said fiscal hawks have oversold fears that financial markets will balk at lending to indebted governments. Aside from a few European countries, particularly Greece, “most government bond markets have shown no such concern,” he said.