National bank Financial Ltd. isn’t forecasting a U.S. recession, but it puts the odds of one at a high 40%.

The Montreal-based firm expects U.S. housing prices to drop an average 10%, a decline that many economists believe could cause a recession. However, NBF thinks continued strong exports and business capital investments should keep the economy growing, albeit at less than 2% in 2007.

Exports will benefit from both increased competitiveness as a result of the drop in the U.S. dollar in the past few years, as well as some upward momentum in Europe and Japan. At the same time, companies have strong balance sheets and profits, providing the money necessary to continue investing. NBF also expects the U.S. Federal Reserve Board to lower short-term interest rates by 200 basis points in 2007 to avert a downturn.

TD Economics of Toronto, which predicts U.S. housing prices will fall an average 4%, also believes a recession can be avoided. But it said in its recent quarterly forecast that the risk of a downturn is “real.” TD expects the Fed to lower rates by 100 bps in 2007 and suggests the combination of that with strong exports and continued “solid” government spending will produce growth of 2.4%.

Toronto-based Bank of Montreal Economics is more optimistic. It sees U.S. housing flattening rather than dropping, and is forecasting growth of 2.9% in 2007, assuming the Fed brings rates down 75 bps.

The rise in U.S. house prices over the past few years has meant that increasingly fewer Americans can afford to buy homes. Affordability has also been affected by the rise in U.S. interest rates, but NBF senior economist Yanick Desnoyers says the real problem is the current level of house prices.

The result has been plummeting sales and soaring inventories of unsold homes. There were 3.3 million U.S. homes for sale in July, up almost one million from a year earlier. In NBF’s view, this will force house prices down. IE