Athough the global economy looks set to slow, the underlying fundamentals are likely to remain positive, says TD Bank Financial Group in a new report.

In the report, TD Economics says that, as a result of higher interest rates, the average annual pace of U.S. economic growth in 2007 will likely slacken. “However, a hard landing is not anticipated and some improvement can be reasonably expected in the latter part of the year,” it notes.

Also, it says, any moderation in U.S. economic growth will impact other economies. “However, given the momentum in world expansion, the overall pace of global growth is expected to remain above its historical average, and there is little chance that the Chinese and Indian boom could be derailed,” it says.

Canada could be adversely affected, it adds, due to weaker U.S. demand and higher interest rates here too. “Overall, the annual pace of Canadian economic growth is forecasted to slow modestly in 2007, but this national perspective masks the likelihood of continued above-average growth in Western Canada, and a sub-par performance in Central Canada and parts of Atlantic Canada,” it predicts.

This weaker economic growth suggests a modest pace of corporate profit growth in 2007, TD notes. Also, it cautions that commodity prices are vulnerable to a further correction, as a slowdown in the U.S. could result in softer global demand for raw materials. “Having said that, price levels should remain high, supported by strong demand from Asia. Some commodities may also break from the general trend. So, while oil prices could drop, natural gas prices are forecast to rise – barring another extraordinarily mild winter,” it says.

Additionally, interest rates are likely to decline in late 2006 and early 2007. “Weaker economic growth would lower the risks of inflation, leading to a rally in bonds. There is also a possibility that the Federal Reserve and the Bank of Canada could cut rates to limit the slowdown. However, as economic conditions gradually recover, interest rates would most likely rise once again,” TD suggests.

The U.S. dollar could also face more weakness relative to the other major currencies, including the Japanese yen and the euro, and the Canadian dollar.

“It should be stressed that the economic slowdown should prove mild and transitory. While economic and financial volatility may be present, the underlying fundamentals should remain positive,” TD concludes. “Unemployment is forecast to remain low, interest rates are anticipated to remain modest by historical standards, and income is likely to continue to rise. As a result, households, businesses and investors should not panic if there are signs of economic moderation, as the economies should recover in the near future.”