OTTAWA - The Canadian economy is headed for a decade of stagnant growth that will test the budgets of governments and ordinary Canadians, says a new TD Bank report.

The bank (TSX:TD) says a combination of post-recession adjustments, the aging population and low productivity will limit Canada's potential growth to about two per cent over the next 10 years.

That is two-thirds the level of growth experienced the previous two decades, the report says.

"It is critical to recognize that things will not simply return to how they were," economists Derek Burleton and Grant Bishop write.

"This represents a 'new normal' for the budgets of households and governments, as well as the returns on domestic capital investment."

The economists forecast that the next decade will essentially split into two categories -- very slow potential growth in the next three years averaging 1.6 per cent, and slightly better but still modest 2.1 per cent expansion in the 2013-19 period.

Over the next few years, the bank says restructuring challenges facing corporations will act as a speed bump to Canada's growth.

But since the economy is currently operating well below potential, actual growth rates in the next few years will likely exceed the 1.6-per-cent potential.

Longer term, TD expects an aging population in Canada will slow labour force growth and the country will need significant productivity gains just to keep the economy on track.

The Bank of Canada has also warned about the tamer cruising speed of the economy coming out of recession, and Kevin Page, the Parliamentary budget officer, is preparing a major report on the impact of the aging population.

The new normal, as the economists call sluggish growth going forward, will present significant challenges both to governments struggling to eliminate massive deficits, and Canadian households.

They say both Ottawa and the provincial governments must curtail spending since inflation-included nominal growth, on which tax revenues are based, will not advance much above four per cent.

In recent years, federal government spending growth has averaged in the six-to-seven per cent range.

As well, the slower economic growth will impact Canadians' standard of living.

"Household income cannot outpace economy-wide growth over the long haul," the economists point out. "(And) households cannot continue to borrow at rates exceeding income growth and prospective asset appreciation."