If the United States were to slip into recession, Canada’s economy would be hit hard, but escape recession itself, according to economic research firm, Global Insight.

The firm has recently increased the probability of a U.S. recession to 40%. But, it notes that Canada’s economy is still relatively healthy and employment growth is very solid.

In this gloomy scenario, “The Canadian economy is not be immune to a U.S. recession,” it says. “As the U.S. economy retreats, foreign demand for Canadian products cools. Dampened exports and lower commodity prices take the steam out of the pace of investments in the resource sector. The Canadian dollar does little to offset the decline, as the loonie stays around par during throughout 2008 and falls to the mid 90s starting in 2009.”

“Even though the U.S. economy experiences a recession in this scenario, the Canadian economy, while weakening, does not. Real GDP for Canada expands at an anemic 0.9% pace in the first and second quarters of 2008. The unemployment rate jumps to 6.3% by the third quarter of 2008 and climbs to 6.6% for 2009,” it predicts. “There is only a slight two-quarter reprieve on CPI inflation during the first half of 2008. The Bank of Canada tempers the economic slowdown and the cooling pressure on prices by cutting the overnight rate to 3.75% during the first quarter of 2008, but then resumes tightening throughout 2008.”

Under an optimistic scenario, the U.S. economy expands at a much quicker pace than the baseline as oil prices ease significantly from their recent highs. “With a boost in the U.S. economy, demand for Canadian goods rises, lifting our export growth. However, the value of exports may be somewhat subdued as oil prices slide,” it notes. “The Canadian dollar falls about a penny, providing further stimulus to exports.”

In this scenario, Canadian economic growth averages 2.6% in 2008 and 2.8% in 2009, both higher than the 2.4% predicted in the baseline for each year. “The Bank of Canada, concerned with stronger economic growth, increases the overnight rate, raising it 50 basis points to 4.75% throughout 2008, as opposed to holding steady at 4.25% as in the baseline,” it says.