In a new research note, National Bank Financial’s economists are turning gloomier on the U.S. economy but still expect Canada to escape unscathed.

NBF has raised the odds of a hard landing in the U.S. to 40% from 25% and has substantially reduced its expectation for growth of personal consumption expenditures in 2007 (to only 1.4% from 2.3%). “This development will set the stage for a recession in U.S. profits,” it warns.

“As a result, we now expect GDP growth of 1.9% in 2007, down from 2.4% in our July-August projection,” it adds.

The slowdown in the U.S. housing market is the central reason for this shift in opinion. “We have long held the view that a bursting of the U.S. housing bubble would be bearish for the U.S. economy,” NBF notes. “In light of the swift buildup of the inventory of unsold homes, it is only a matter of time before prices decline at the national level.

“In our opinion, a deterioration of household net worth, at a time when the sum of the household energy bill and financial obligations has risen to a record share of disposable income, will force consumers to rebuild their savings rate,” it says.

With this gloomy outlook, NBF also sees the U.S. Federal Reserve Board cutting its policy rate 200 basis points by the end of next year, to 3.25%.

However, despite Canada’s strong ties with the U.S. economy, our country does “need not necessarily face a similar outcome if we use the past as a guide,” NBF says. It points out that there was no recession in Canada despite U.S. downturns in 1970, 1973, 1980 and 2001.

“As a matter of fact, Canada was able to withstand three consecutive U.S. recessions during the 1970s commodity price boom because of its status of net exporter of natural resources,” it notes.

“With energy prices likely to remain elevated in the coming years due to the current geopolitical situation in Middle East and the persisting positive terms of trade shock caused by the rise of China and India, we believe that Canada is once again well positioned to withstand a U.S. slowdown,” it says. “Even more so now that Western provinces account for roughly a quarter of Canadian GDP.”

It also points out that Canada’s public finances are healthier now than they were in the 1980s or 1990s, as Canada now boasts the lowest debt to GDP ratio among the G-7. “Having both fiscal and monetary policy tools available to deal with the U.S. headwinds should provide an insurance policy for Canadians,” it concludes. “We estimate the probability of hard landing at only 15% in Canada.”