The U.S. economy is on the right track to faster growth, but obstacles will slow progress over the next year, according to a report released by TD Economics.

“The U.S. economy is healing from the scars of the Great Recession,” said TD chief economist Craig Alexander. “While the path to health is becoming clearer, the European recession, the drought in the Midwest and uncertainty over domestic fiscal policy will continue to weigh on the recovery.”

TD Economics forecasts economic growth to average 2.2% in 2012 and 2.0% in 2013. Growth is expected to rise to 3.2% by 2014, as the European economy makes further headway and the outlook for domestic fiscal policy becomes clearer.

The relatively slow pace of economic growth over the short term will leave the unemployment rate unchanged at 8.1% through the end of this year. It is expected to edge down to 7.7% by the end of 2013, and improve further to 6.9% by the end of 2014.

Economic growth has averaged a mere 2.2% over the last three years, half the average rate seen during the recoveries following the last ten recessions. Such a frustratingly slow rate of growth is a legacy of the debt accumulated during the boom years and the drop in home prices that followed.

Fortunately, progress is being made on both fronts. Home prices are finally growing again for much of the nation. As asset values recover, households are making stronger headway in bringing debt burdens down to more sustainable levels.

“The improvement in household balance sheets is important,” said Alexander, who calculates that households have recovered 70% of their net-worth lost during the recession. “In combination with the Federal Reserve’s support for the mortgage market and commitment to continued low interest rates, it provides a foundation for faster economic growth.”

For complete findings of the TD Economics report click here.