The International Monetary Fund says that the economic outlook for the Western Hemisphere remains strong, although fallout from the housing market in the United States poses a risk.

Despite tighter monetary conditions, global growth is expected to be around 5% in 2006 and 2007, it predicts. Decelerating growth in the U.S. to about 2.5% in 2007 is expected to be offset by higher growth in the euro area and Japan, and continued high growth in emerging Asia.

The U.S. remains a major engine of global growth, although growth is now expected to slow somewhat below potential, the IMF says. On an annual basis, growth is expected to decelerate from about 3.5% in 2006 to around 2.5% in 2007, as a cooling of the housing market slows residential investment and consumption spending. Business investment is likely to remain solid, especially in light of the recent decline in oil prices, strong profits, and low long-term interest rates.

The risks to this forecast are mainly to the downside, particularly if there is a faster-than-expected weakening of housing activity in the next months.

The Canadian economy is projected to expand by about 3% in both 2006 and 2007— although outcomes will be closely linked with those in the U.S., the IMF says. “Economic growth has been boosted by high commodity prices, private consumption growth and, as in the United States, healthy corporate profits and business investment, which have offset the drag of a strong currency,” it says. “Notwithstanding a relatively tight labor market, inflation is expected to remain well-anchored within the context of the inflation-targeting regime and fiscal surpluses, which have kept the debt/GDP ratio on a downward trajectory.”

The Latin America and the Caribbean (LAC) region is expected to grow by 4.75% in 2006 — making the ongoing expansion the most vigorous for some decades — and by about 4.25 percent in 2007. Domestic demand in the LAC region is buoyant, driven both by higher public spending, and private consumption and investment, the IMF says. Yet, inflation has generally remained subdued and is expected to decline moderately further, to a regional average of about 5% in 2007.

However, there are clear downside risks to the outlook, the IMF says. They include: a possibly sharper slowdown in U.S. growth; unexpected tightening of global financial markets; commodity price volatility, particularly sharply lower non-oil commodity prices; and trade pressures following the erosion of preferential access in the Caribbean and lack of progress on agreements to liberalize trade further.