Canada's economy faces subdued growth in the new year as an initial strong rebound from the recession shifts into a more sluggish expansion, a prominent think-tank says.

In its outlook for 2011, the Canadian Chamber of Commerce said "more prudent spending" by Canadians is a factor in the country's slowing economic growth. Gross domestic product expanded by 2.3 per cent in the second quarter of 2010 and only one per cent in the third quarter.

"The Canadian economy is chugging along, but not at full steam," chamber CEO Perrin Beatty said.

The chamber also expects the Bank of Canada to stay on the sidelines, leaving key lending rates as they are, until next summer. It predicts the overnight target interest rate will reach two per cent by year-end 2011 and three per cent by year-end 2012.

Canadians working to repair their own financial situations and get debt under control will cause the economy to grow at an average annual rate of less than 2.5 per cent in 2011, the chamber said in the report.

A cooling housing market, wobbly U.S. economy and the winding down of government stimulus cash will all contribute to the muted growth, the chamber said.

Meanwhile, the higher Canadian dollar and soft demand from the United States will curb demand for exports, while import growth is also expected to slow as domestic spending moderates.

"We believe Canada's relatively strong fundamentals—an enviable fiscal position, a strong banking system, widening interest rate differentials and favourable commodity prices—will save the loonie from excessive downside pressures. These forces should hold the Canadian dollar near and slightly above parity in 2011 and 2012," Beatty said.

CBCNews