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The Globe and Mail

Flaherty balks at second stimulus program - for now

Finance Minister Jim Flaherty says Canada's economic growth is "substantial" and unlikely to require more government stimulus to sustain what is becoming an increasingly fragile recovery.

The finance minister was reacting to media questions a day after the Bank of Montreal warned weakening conditions in the United States may put Canada's recovery in jeopardy.

"Our view is that we have substantial economic growth in Canada," Mr. Flaherty said Friday in Whitby, Ont., before conceding the momentum has been slowing since the early part of the year and that he will "continue to monitor the situation."

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But Mr. Flaherty also said the government's "imperative" remains to complete spending under the two-year, $47-billion economic action plan that runs out next March 31.

If there was any wiggle room in the minister's remarks it's that he did not directly rule out more stimulus and, unlike on many past occasions, he did not repeat a well-worn government catchphrase that the stimulus was on a "use it or lose it" basis.

The issue of a second stimulus program has gained more traction in the past few weeks as evidence mounts that the U.S. recovery is stalling, and may stumble into a double-dip recession.

A severe U.S. slowdown would be felt in Canada, says BMO economist Douglas Porter, and may necessitate Ottawa and some provinces extending their stimulus spending beyond their current sunset dates.

Liberal finance critic John McCallum, a former chief economist with the Royal Bank, called it "at best imprudent and at worst ideological" to draw a line on the sand about when to withdraw stimulus and begin spending cuts.

"The budget is not for several months and for the government to say definitively they are going to withdraw stimulus before knowing the state of the economy, we think is irresponsible," he said in a telephone interview.

Mr. McCallum also called on Ottawa to meet its commitments under the $4-billion infrastructure program beyond the March 31 deadline if projects are running behind schedule.

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Earlier this week, parliamentary budget watchdog Kevin Page estimated that up to $500-million of the program, shared by provinces and municipalities, could go unspent if the strict deadline is observed.

Meanwhile, Mr. Flaherty conceded "some countries in the world may need to stimulate their economies more," adding "Canada is doing relatively well on the economic growth side."

That better describes Canada's economy as it was in the fourth quarter of 2009 and first quarter of 2010 - when output advanced 4.9 and 6.1 per cent respectively and jobs were being added at an impressive pace.

In April, growth in the gross domestic product turned flat, followed by an anaemic 0.1 per cent advance in May, the last two months for which GDP data is available. As well, Statistics Canada reported July saw the first retreat on jobs since January.

The slowdown has been so severe that Canada may no longer be in a position to boast the fastest rebound from the recession among advanced G7 countries.

Germany announced Friday its gross domestic product exploded by nine per cent in the second quarter, compared to what is now expected to be a mid-two per cent expansion in Canada. Canada tripled Germany's 1.9 per cent growth in the first quarter.

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Economists warn Canada's economy could slow further if the U.S. continues to struggle with high unemployment and low consumer confidence.

"The Great Recession should still be behind us. But welcome to the Great Disappointment," CIBC chief economist Avery Shenfeld wrote in his weekly sign-off to clients.

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