Washington’s economy, pummeled by the nation’s worst recession in decades, is on the mend, slowly. 

But employers will continue to shed jobs throughout the year before they are able to start hiring again next year, and a fresh report from the state Economic and Revenue Forecast Council shows tax collections are still lagging.

The bottom line for Governor Gregoire and the Legislature: A daunting $1.2 billion budget gap – and maybe more – is staring them in the face this winter. 

A leading conservative voice, Senate Republican budget leader Joe Zarelli, is urging the governor and majority Democrats to get started on the new round of budget cuts by meeting in special session for a few days in early December.  That’s when lawmakers already are scheduled to be in Oly for committee days (and fundraising for the 2010 campaigns).

The new economic report says consumer confidence remains weak and adds:

“At some point, private spending, both consumer and business, will need to replace government spending. If it doesn’t happen in time, we risk a double-dip recession.”

The state recovery is fragile, the report says.

Moderate job growth should kick in next year, and the state should outpace the national recovery, given the state’s success with international trade and the stability of aerospace and software, writes chief economist Arun Raha. Housing construction has “finally turned the corner,” he adds.

Still, the report says tax collections were off by $32 million in the past month, counting an unexpected need to refund $13 million in a business taxes.  Next month, the council will update the revenue forecast that Gregoire will base her budget revisions on.  The governor and Legislature are expected to ignore the call for a special session and deal with the problem next winter.