The Canadian economy is stuck in neutral, dragged down by debt-laden households and deficit-fighting governments, Toronto-Dominion Bank said in its quarterly forecast released today.

"Canada’s economy is stuck in a soft patch," the bank's economics team said. "Fatigued households and debt-laden governments have recently been shifting their attention to restraint. Meanwhile, a weak global environment and an elevated exchange rate are weighing on the export sector."

They're all adding up to keeping Canada's economy in a funk, with growth below two per cent and unemployment above seven per cent for the next while, the bank says.

'The tide seems to have finally turned.'—TD on Canada's housing market

"With no engine firing on all cylinders," TD says it expects Canada's economy will grow by 1.8 per cent this year, before moving slightly above two per cent in 2013 and 2014. "Canada’s economy appears to be at a crossroads."

Government and household spending accounted for roughly 90 per cent of Canada's GDP last year, and those two factors show no signs of being able to pick the economy up by its bootstraps anytime soon. Household debt has hit a record of 152 per cent of disposable income, and government debt-to-GDP ratios have risen considerably in recent years, especially at the provincial level.

"With the household and government sectors preoccupied with repairing their balance sheets, the stage is set for Canada’s export-oriented business sector to step up to help sustain Canada’s expansion," the bank says.

Canadian corporations have quietly amassed significant amounts of cash in recent years. That should serve them well to invest now, with the Canadian dollar strong.

Housing correction underway, report says

Gradual progress against the major international headwinds such as the ongoing European financial crisis, an anemic U.S. recovery and slowing emerging economies should improve Canadian exporters' performance, but not until early 2013, the bank warns.

"Overall, corporate profits are likely to advance at a healthy five to seven per cent pace over 2013 and 2014 on the back of improved global demand," TD said.

On the housing front, the bank says it looks like the correction is underway, driven by a sharp slowdown in the Vancouver market. "The tide seems to have finally turned."

TD expects the slowdown will become more broad-based after the government recently moved, for a fourth time, to tighten the rules surrounding who qualifies for a mortgage.

"The economy is now left with a debt overhang and an overbuilt, overpriced housing market," TD said. The bank estimates that on average, Canada's housing market is likely about 10 per cent overpriced, and is due for a slow, gradual correction.

"The adjustment is expected to occur gradually over the next [two or three] years, which should be quite manageable for most Canadian households," TD said.