PARIS - The world's rich and developed economies will grow faster next year than earlier expected, but the recovery will remain modest, with the United States and Japan outpacing Europe and other developed economies, including Canada, a Paris-based watchdog said Thursday.

The Organization for Economic Co-operation and Development more than doubled its estimate for 2010 growth in its 30 member countries - which include Canada, the U.S., Japan, Germany and the United Kingdom - to 1.9 per cent.

Still, the recovery is expected to remain fragile.

"In most OECD economies, growth is likely to fluctuate around a modest underlying rate for some time to come," said the organization's top economist, Jorgen Elmeskov, in an editorial.

"It is being held back by still substantial headwinds. It is only some time down the line that the recovery will become sufficiently strong to begin to reduce unemployment."

The OECD also reduced the expected contraction this year to 3.5 per cent from an earlier forecast of 4.1 per cent. The organization publishes its economic outlook twice a year, although it updated some 2009 forecasts in an interim assessment published in September.

In Canada, "the contraction that began in the last quarter of 2008 seems to have ended in the second half of 2009," the OECD said in its country survey. "External demand and domestic investment now appear to be rebounding, but they also pose the greatest risks to the recovery's sustainability."

It said unemployment in Canada is projected to keep rising until the end of 2009 to 8.8 per cent, above the latest reading of 8.6 per cent in October, and will remain there for several months.

In addition, "underlying disinflation (will) continue for several more quarters under the weight of persistent slack."

The OECD said the Bank of Canada should stick to its promise to keep its key lending rate at 0.25 per cent through to June of 2010, as it has already promised, and maybe even longer.

The OECD expects a contraction of 2.7 per cent in Canada's gross domestic product this year, with the economy expanding by two per cent in 2010 and by three per cent in 2011, slightly better than the 2.8 per cent forecast that year for the United States.

The U.S. economy has been boosted by stimulus measures, improving financial conditions, demand from the fast-growing non-OECD economies of Asia - especially China - and the stabilization of the housing market, the OECD said. It predicted unemployment will start to ease after peaking in the first half of 2010.

It predicts the U.S. economy will expand at a rate of 2.5 per cent in 2010, up from a June forecast of 0.9 per cent. It also expects a smaller contraction this year: a 2.5 per cent fall in output compared with an interim September forecast of a 2.8 per cent drop.

In Europe, the economies of the 16 countries sharing the euro are now expected to grow by 0.9 per cent next year compared to a June forecast of zero growth. However, the OECD predicts a greater contraction of four per cent this year, more than the 3.9 per cent it calculated in September.

Unemployment is not set to peak before the end of 2010 or the beginning of 2011, and is likely to sap the strength of recovery, the OECD said.

Japan's economy will grow by 1.8 per cent next year compared with the June forecast of 0.7 per cent. The OECD reduced its prediction for a contraction this year to 5.3 per cent compared to a 5.6 per cent rate seen in September.

Elmeskov said central banks should keep interest rates low and should beware of the dangers of deflation, while governments should work on plans to reduce debt levels as the economy recovers.

As growth picks up, policy makers will need to mop up some of the excess liquidity caused by policies designed to keep credit markets open when they threatened to freeze during the peak of the crisis.

The OECD suggests phasing out banks' use of funding guarantee schemes by making them more expensive rather than ending them, to avoid having to reintroduce them in case of renewed instability, which could undermine confidence.

International co-ordination will be needed to roll back extended deposit insurance "as few countries may be willing to move ahead alone with a measure that could weaken the competitiveness of domestic banks," it said.

-With files from The Canadian Press