Economists at Canada’s big banks have downgraded their growth forecasts for the United States, but tend to agree the Canadian economy will manage to keep its head above water even as the U.S. continues to struggle.

Craig Alexander, vice-president and deputy chief economist at TD Economics, says the coming quarters will prove wrong the idea that the global economy is decoupling from that of the U.S. He notes a tightening of purse strings south of the border is sure to slow things down in many economies, including Canada, and he forecasts world economic growth will tumble a full percentage point to 4.2% this year.

The number crunchers agree that credit woes and weak real estate markets are stalling U.S. growth for longer than expected. Royal Bank of Canada assistant chief economist Paul Ferley says the U.S. is on the cusp of a recession. He expects GDP growth to average 1.4% for 2008, taking into account the $150 billion fiscal stimulus package that recently passed in Congress and assuming the U.S, Federal Reserve cuts interest rates by a further 100 basis points.

Bank of Montreal senior economist Sal Guatieri’s U.S. growth forecast is slightly more modest, at a 1% average for the year. He says housing markets have yet to bottom out, consumer and business confidence have collapsed and credit standards are tightening. U.S. home sales plummeted 17% in the final two months of 2007. Gautieri likens the current U.S. economic situation to that of the 2001 downturn and says it is “probably in a mild recession,” but adds it “could be short and shallow” and turn around by the end of the year.

Bank of Nova Scotia’s newly downgraded U.S. growth outlook is mildly stronger, at 1.6%. “The U.S. economic locomotive continues to lose steam,” said the bank. “There is no end in sight as of yet to the contraction in housing-related activity that has generated the U.S. slowdown.” Scotia economists say that weakness in equity markets suggests a negative outlook for earnings and the January decline in U.S. payroll shows that Americans just won’t be able to spend as much.

According to the UBS-International Council of Shopping Centers, U.S. retail sales rose a weak 0.5% in January, below the 1.5% forecast. December’s miserable holiday season growth rate was 0.7%. These paltry retail sales figures are further evidence that consumer demand is decreasing in the face of struggling housing market, a weakening job situation and the continuing credit crisis.

What does all this mean for Canada? Well, Ferley says the slowing will certainly spill over into Canada, but that commodity prices will temper the downward impact. He expects demand in emerging economies such as China to remain strong enough to keep commodity prices up.

Alexander disagrees. He says the moderation of the global economy means Canada cannot count on commodity prices to provide an offset and he puts Canadian GDP growth at “roughly comparable” to the U.S., just below 2%.

Scotiabank economist Adrienne Warren says low unemployment, solid income growth and a strong housing market are making sure consumer spending plows ahead. But she warns that further weakening south of the border combined with a strong Canadian dollar will be “challenging,” particularly for the struggling domestic manufacturers. With U.S.-destined goods accounting for 30% of national output, these net trade volumes will be a “sizable drag” on growth, she adds, despite global demand for Canadian commodities.

The good news is the worst is already behind us, according to Dale Orr, managing director of Canadian macro services at Global Insight. Orr says there is no need for the Canadian government to poke and prod the economy with a fiscal stimulus package, as the Bush administration did for the U.S. According to Orr, this is only necessary if things get far worse and at this point steadying the economy is a job for the central bank, not the central government.

The Bank of Canada has cut its target for the overnight rate by half a percentage point since October and economists widely agree that further cuts will come down at the next interest rate announcement on March 4.

Finance Minister Jim Flaherty is set to table the government’s 2008 budget Tuesday at 4 p.m.