The Canadian economy will strengthen in the new year, although it will fall short of historical post-recession recoveries with growth held to just 3.2%, according to RBC Economics.

That’s pretty much a repeat of the bank’s forecast for full-year 2010 growth of 3.1%. The longer term forecast sees another 3.1% growth year in 2012. While these growth rates are a little sluggish for a recovery, they will be refreshing after a 2.5% contraction in 2009.

“The mid-year [2010] economic slowdown reflected a pullback in housing investment, which fell after five consecutive quarterly increases, and a mild downturn in exports. However, financial conditions remain supportive of domestic growth which will be the main engine of the expansion going forward,” said Craig Wright, senior vice-president and chief economist, RBC.

Wright predicts consumer spending – so far, the prop upon which the recovery has relied – will ease, with business spending taking over as the primary economic driver.

With the recovery growth rate that looks more like mid-cycle growth, the national employment picture will improve only gradually. The unemployment rate will end 2010 just under the 8% mark, and will improve to only 7.4% by the end of 2011, and 7.0% by December 31, 2012.

Saskatchewan is expected to take over from Newfoundland as the fastest growing provincial economy, with Alberta ranking second and Newfoundland in third. All three provinces will benefit from higher resource demand fueled by the global recovery.

Manitoba and Ontario are predicted to take the fourth and fifth spots, while British Columbia is expected to keep pace with the national average. The Maritimes and Quebec will lag the national average in growth.

Dragging on overall growth, the Canadian dollar will trade around parity with its American counterpart through 2012, slowing non-commodity export-reliant sectors.

Speaking of our main trading partner, U.S. gross domestic product is expected to finish 2010 with a growth rate of 2.7%, but will ramp up to 3.3% in 2011. Successive rounds of monetary and fiscal stimulus should make 2012 an even better year south of the border, with growth accelerating to 3.6%.