A double dip recession isn’t likely, but with the economic growth risks to the downside, fiscal and monetary policy should remain stimulative, says BMO Capital Markets.

“In our view, a double dip is unlikely, but U.S. growth will remain below 2% in the second half and post a sub-par 2.2% growth pace in 2011,” BMO says in a research note. It notes that these growth rates are far weaker than in the first six months of the recovery, and suggest that U.S. unemployment will improve slowly.

For Canada, it predicts that GDP growth will be only slightly stronger than in the U.S., posting a 2.5% pace next year.

“Most of the risks, however, in both countries are on the downside, so we caution against aggressive fiscal or monetary restraint,” it says.

BMO predicts that, in the U.S., the Federal Reserve is not likely to hike rates until late 2011, if then, and will likely introduce a second wave of quantitative easing. And, it says, the Bank of Canada will “continue to be mindful of the downside risks and could well refrain from further rate hikes in coming months.”

That said, it sees one more 25 basis point hike this year, and another full percentage point of tightening next year to take rates to 2.25% by the end of next year. It also predicts that the Canadian dollar will trend towards parity next year.

“On the fiscal side, political considerations enter the equation, especially in the U.S. with the coming election. Washington should provide additional stimulus and extend the Bush tax cuts temporarily. The economy is far too weak to consider fiscal tightening this year or next,” it adds.

“In Ottawa, the same considerations are warranted. Canada’s fiscal balance sheet is among the strongest in the OECD, so there is no need to aggressively tighten soon.”