The Canadian economy will slow down this year, after all, the International Monetary Fund said today, as it lowered its growth estimates for Canada’s GDP.

In its semi-annual World Economic Outlook, the IMF cut its growth projection for Canada’s economy to 2.4% in 2007. That’s half a percentage point lower than its forecast of last September, when the IMF predicted that the Canadian economy would largely avoid a U.S.-led global slowdown.

“Domestic demand growth is expected to weaken as a result of earlier interest increases,” the IMF said. Beginning in mid-2004, the Bank of Canada raised interest rates nine times in the following two years — pushing its key overnight lending rate from 2% to the current 4.25%.

But the IMF added that “the negative contribution in growth from the external sector should ease during the course of the year as the U.S. economy rebounds and the effect of past currency appreciation dissipates.”

The IMF outlook predicts that U.S. economic growth will slow to 2.2% this year. It expanded by 3.3% last year. The IMF said the U.S. housing sector was “a substantial drag” on growth.

Still, it forecasts that a pause in U.S. growth seems more likely than a recession, pointing out that the U.S. labour market remains robust, unemployment is stable, interest rates are low, and corporate profits are high.

For 2008, the IMF predicts economic growth will rebound to 2.8% in the U.S. and 2.9% in Canada.