BMO Capital Markets suggests that more fiscal stimulus might be needed to revive flagging confidence and the faltering economic recovery.

In a research note published on Friday, Sherry Cooper, chief economist at BMO Capital Markets, notes that with economic activity in Canada slowing in line with the slowdown in the rest of the world, business and consumer confidence is shaky, “edging downward as great uncertainty continues to weigh on sentiment.” This, in turn, weighs on both investment and the job market.

“Inevitably, this weakens Canadian economic activity both directly—through weaker exports—and indirectly, through reduced confidence,” Cooper says, adding that this has also revived fears of a double-dip recession.

“Fear of a double dip can be self-fulfilling,” she cautions. “First among the causes for concern is the effect of falling business and household confidence, the glue holding the global recovery together.”

“Optimism would improve if companies shifted spending and retained earnings toward hiring, helping consumers overcome their rut. But, something needs to spur business confidence for that to happen,” she says.

As exceptional uncertainty weighs on both consumers and businesses, Cooper says, “We will continue to spiral through this negative loop, raising the prospects of a double dip, until something penetrates the gloom and spurs confidence in a brighter outlook. What this something might be is once again uncertain.”

“My view is that some additional fiscal stimulus is necessary—hopefully in the form of corporate tax cuts and additional federal assistance to state and local government, an enormous source of new layoffs. I believe a double dip is unlikely, but we are clearly in store for sub-par growth and only a very slow rise in hiring,” she concludes.

IE