LOS ANGELES (Reuters) - California's economy, the biggest in the United States and the ninth-largest in the world, will see a slight improvement in 2012 but a recovery in the crucial housing market is at least two years away, according to a report released on Wednesday.

California was one of states hardest hit by the 2007-2009 recession and will continue to lag nationaleconomic indicators as the national picture improves, says the report by the Los Angeles County Economic Development Corporation (LAEDC).

Overall, the report forecasts that California will see economic growth of 1.5 percent this year, and will add 200,000 jobs, with the unemployment rate averaging 11.1 percent.

That compares with a national average today of 8.3 percent unemployment, down from 9.1 percent in January 2011.

The Californian economy "will continue to heal but the process is uncomfortably long," the report says. Unemployment will still be at 10.3 percent in 2013, according to the LAEDC, a nonprofiteconomic development organization.

The leading economic sectors in 2012 will be the booming technology sector centered around companies such as Google and Facebook in Silicon Valley, tourism, international trade and the entertainment industry.

But the crisis-hit housing sector in California, although expected to see some improvement, is still a long way from full recovery, the study says.

Southern California was particularly hard hit by the collapse in the housing market and the financial crash of 2008, with an epidemic of foreclosures. Even today, 44 percent of homeowners in the region owe more on their mortgages than their homes are worth.

"As the calendar turned to 2012, the timeline for recovery in the housing market continued to be measured in years and not in months," the report says.


A huge backlog of foreclosed homes that have yet to be sold continues to depress house prices, which increases the number of mortgage holders with negative equity. In 2011 home prices in California actually fell compared to 2010.

"To date, rock-bottom mortgage interest rates and good affordability have not been enough to entice buyers back to the market," the report states.

"What happens in 2012 will depend on how fast lenders work through their foreclosure files."

In addition, the report says, "tighter mortgage lending standards and fundamentals such as slow job growth and flagging consumer confidence have dampened demand" in the housing sector.

The LAEDC forecasts a better housing market for California in 2012 but with significant risks remaining, especially if job growth fails to accelerate. Foreclosures and negative equity "remain significant hurdles to recovery," it adds.

The Californian economy is so large that its performance is inextricably linked to the national and global economies, the reports says.

California has fallen from eighth to ninth in the list of the world's largest economies, behind Brazil and Italy, but still ahead of India, Canada, Russia, Spain and Australia, according to the study.

(Reporting By Tim Reid; Editing by Xavier Briand)