A chassis built at Toyota's Woodstock, Ont., assembly plant. The province's auto sector is susceptible to more turbulence, an RBC report said Thursday. (CBC)

Ontario's economy is expected to outpace the national average with 3.3 per cent growth this year and 4.1 per cent growth in 2011.

RBC Economics says increased housing activity and greater vehicle production spurred a return to positive growth in late 2009.

The bank forecast says Ontario's construction sector should see a rise in activity in 2010, fuelled by higher capital spending.

It also says high demand for real estate should extend to new homes, with housing starts likely to hit 64,200 units this year — 14,100 more than in 2009.

But, the report says, "this recovery will not be evenly felt across economic sectors. For instance, the province’s hard-hit manufacturers will continue to face many obstacles. Top on the list of impediments will be the continued strength in the Canadian dollar ... which will dampen the beneficial effect of improving demand south of the border."

RBC notes that a strong Canadian dollar limits U.S. demand for Ontario exports and the auto sector is susceptible to more turbulence.

The forecast also predicts the introduction of the new harmonized sales tax [HST] in Ontario on July 1, will be 'possibly the biggest policy event to occur in 2010."

"Although the HST will result in certain currently exempt products and services being taxed, moving to a value-added tax structure will make the tax system more economically efficient and will improve the competitiveness of Ontario businesses by lowering the cost of doing business in the province. The benefits of such a tax system will accrue over the medium to longer term."

The report says the Ontario economy should improve this year and next as more industries move into recovery mode.