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OTTAWA (Reuters) - Canada's economy is in for several years of limited growth even after it fully recovers because of an aging population and damage from the recession, the Organization for Economic Co-operation and Development said on Monday.
The OECD estimates that the Canadian economy won't be able to expand more than 1.6 percent a year between now and 2017, more than a full percentage point less than over the past decade.
Ottawa can help raise the potential growth rate, a kind of speed limit based on how much the economy can produce, by allowing more foreign ownership of industry and reforming the employment insurance program, the Paris-based organization said.
The OECD report provided a snapshot of the country's situation as of June this year.
"This slowdown reflects primarily lower growth in the working age population, but also likely temporary negative effects from the crisis on capital accumulation, structural unemployment and labor-force participation," it said.
The OECD's outlook for growth of 3.5 percent this year and just over 3 percent next year roughly coincides with the Bank of Canada's latest projections in July.
The OECD said the central bank should continue to raise its policy interest rate at a "measured pace" toward neutral rates by the end of 2011. The Bank of Canada does not comment on what it considers a neutral rate but economists estimate it to be between 3.5 percent and 4.5 percent.
The bank nudged up its rate last week to 1 percent in the third successive hike this year, but Governor Mark Carney warned that the outlook is highly uncertain.
The federal government is running a marginal structural fiscal deficit, the OECD said, although it raised the alarm over ballooning deficits at the provincial government level.
"The two largest provinces, Ontario and Quebec, face especially challenging fiscal situations," it said. "Many jurisdictions have relatively high debt levels, and their windows of opportunity to bring indebtedness down are closing as demographic pressures on public purses are set to intensify."
Most governments should be able to balance budgets without tax hikes or spending cuts and simply restrain the rate of growth in spending, the report said, echoing the deficit reduction strategy of the current Conservative government.
It urged some provinces to provide more detail on how they plan to tackle their bulging deficits.
And household debt-to-income ratios and debt-to-asset ratios remain at near historic highs, the OECD warned.
"Household credit needs to slow down, which may well moderate private spending and residential investment in the coming quarters."
Reporting by Louise Egan; editing by Janet Guttsman