TORONTO (Reuters) - Ontario’s economy expanded modestly in the third quarter, overcoming a slight decline in the prior quarter and steering Canada’s manufacturing heartland further away from the threat of another recession.

An Ontario government report released on Monday showed the economy of Canada’s most populous province grew by 0.7 percent in the July-September period, reversing a 0.2 percent second-quarter slide.

The province, which relies heavily on the shipment of autos and parts to the United States, saw exports rise 1.1 percent, while imports fell 0.6 percent. It also reported employment rose 0.7 percent in the quarter, with the jobless rate at 7.7 percent, down from 9.4 percent at the height of the global slowdown in May 2009.

“We’ve had a modest recovery. Unemployment remains too high. This is all about jobs in a growing economy and will be in the next budget. So there’s more to do. We are not insulated from world conditions,” Ontario Finance Minister Dwight Duncan told reporters.

He added however that Ontario’s biggest concern is not Europe’s debt crisis, but how the recovery plays out in United States, Canada’s biggest trading partner by far and a key market for Ontario manufacturers.

Duncan said the third-quarter data should lead to 2011 real growth of 2.7 to 2.9 percent and noted gross domestic product above the pre-recession level.

Last quarter, the auto sector was hit hard by supply chain disruptions caused by the tsunami in Japan, thrusting Ontario - and Canada’s economy as a whole - into contraction for the first time since the global financial crisis.

Statistics Canada reported in November that the country’s economy recovered sharply in the third quarter.

Ontario said real output by industry advanced 0.9 percent in the third quarter, following a 0.3 slip in the second, with both the goods-producing and service sectors posting gains.

In November, the province cut its growth, revenue and reserve targets, but said it was still on track to eliminate its C$16 billion ($15.71 billion) deficit in six years, without lowering total program spending or raising taxes.

The government will release its 2012-13 budget in the spring, after a highly anticipated report of policy recommendations from former Toronto-Dominion Bank chief economist Don Drummond, which is expected in late January or early February.

“The most recent numbers from (Statistics Canada) show Ontarians are saving more, they’re borrowing less. I think government needs to do what the people are doing,” said Duncan.