Canadian economic growth will pick up the pace next year after a recent lull, to push the annual growth rate higher in 2011, according to the latest economic outlook from RBC Economics.

Economic growth slowed in the third quarter of this year, largely due to softness in the housing market and U.S. economy, the report found.

However, the report says, improving financial market conditions and lingering low interest rates will boost GDP to 3.2 per cent in 2011, slightly more robust than 2010’s projected growth of 3.1 per cent.

“The mid-year economic slowdown reflected a pullback in housing investment, which fell after five consecutive quarterly increases, and a mild downturn in exports,” said Craig Wright, senior vice-president and chief economist at RBC.

“However, financial conditions remain supportive of domestic growth which will be the main engine of the expansion going forward.”

Consumer spending, which has largely powered the economic recovery, is expected to slow. Instead, business capital spending will play a pivotal role in the economy’s growth as consumer spending slows and pressure persists on businesses to boost productivity.

RBC’s projected growth this year and next will be the fastest pace over the past four years.

“While the recovery is proving to be weaker than those previously experienced, economic growth in 2010 and 2011 is a substantial improvement from the contraction of 2.5 per cent experienced in 2009,” Wright said.

But growth will still be moderate, meaning it will be difficult to lower the unemployment rate, which is expected to close out the year under eight per cent and decline slightly to 7.4 per cent by the end of 2011.

The bank forecasts that the unemployment rate will continue to moderate slowly, reaching seven per cent by the end of 2012, while GDP is expected to rise by 3.1 per cent that year.

Saskatchewan is expected to take over from Newfoundland & Labrador as the fastest growing province. Alberta will also move ahead of that province.

Nova Scotia, New Brunswick and Prince Edward Island are projected to remain at the lower end of the scale through to 2011.

Meanwhile, the bank expects U.S. GDP to improve in 2011 moving from an estimated 2.7 per cent this year to 3.3 per cent in 2011.

“The downdraft in U.S. growth in the middle of the year appears to have come to an end with the number of upside surprises in the economic data solidly outpacing the downside recently,” the report said.