The economic recovery in Canada has "slowed sharply" but is expected to advance moderately over the next two years barring a sharp advance by the Canadian dollar that could further weaken export sales, says the latest outlook from the Organization for Economic Co-operation and Development.

Canada's unemployment rate is expected to remain steady, in the high 7% range, through 2011, while the large amount of slack in the economy should keep inflation subdued, according to the Paris think-tank's forecast, released Thursday morning.

It said the Bank of Canada should keep its key benchmark rate as is through early 2011, and barring a "further deterioration" in the labour market, Ottawa proceed as planned with its deficit-cutting program.

The outlook highlights some of the "significant" risks the global economy faces, from debt woes in Europe to further weakness in housing activity in both the United States and Britain. Other areas of downside risk cited relate to: an upward revision in inflation expectations; lingering uncertainties about banks and the availability of credit; large capital inflows into many emerging economies, prompted by the Federal Reserve's asset purchases that could lead to tighter credit conditions; and tensions created by widespread currency interventions.

Overall, the OECD said it expected its members -- mostly advanced economies -- to post growth of 2.8% this year, 2.3% in 2011 and 2.8% in 2012.

The OECD said that despite some underlying tensions, industrialized economies must carry on with deficit-reduction plans despite some inevitable short-term consequences on GDP growth.

"Implementing decisive and credible fiscal consolidation would avoid the risk of a vicious circle linking higher debt ratios to higher risk premia and lower growth, and would instead promote higher growth and a virtuous circle."

The outlook comes with the global economy in a tenuous position, as Europe's debt woes have reemerged and roiled markets.

The OECD has pencilled in growth of 3% for Canada this year, 2.3% in 2011 and a rebound to 3% in 2012. With the exception of 2012, this matches what the Bank of Canada has forecast.

"The economic recovery has slowed sharply as a result of waning expansion of external demand and a retrenchment in household spending growth," the OECD said about Canada. However, economic activity "is nevertheless projected to progress at a moderate pace through 2011-12 as employment prospects and external demand gradually pick up again."

Investment by the business sector, bolstered by strong earnings and accommodative credit conditions, is expected to pick up the slack.

One big concern, however, is further strengthening of the Canadian dollar, as the U.S. currency weakens in the face of the Fed's US$600-billion asset purchase plan.

A stronger dollar could damage business confidence, especially in manufacturing, and weaken exports, the OECD said.

The Bank of Canada had looked to an increase in exports to offset some weakness in consumer demand, as overstretched households cut back on spending. Recent data indicated export volumes plunged 2.3% in September following a 1.8% gain in August and a 0.1% rise in July.

This should lead to a sizable drag from net trade on third-quarter GDP, analysts say.