The Canadian economy is set for a muted year, thanks to an expected housing slowdown in the U.S., before it picks up in 2008, a survey showed Wednesday.

Most economists and investors expect growth of 2.5 per cent this year after around 3-per-cent growth in 2006, according to an annual Watson Wyatt survey of economic expectations.

Domestic demand will still be the main driver of growth this year because of robust consumer spending and business investment, about 40 Canadian economists and portfolio managers predicted.

“Mid- and long term projections remain optimistic, suggesting that the slowdown is temporary and the Canadian economy will pick up again in 2008,” the survey said.

They expect the unemployment rate will stay under 6.5 per cent in 2007, while wages are expected to outpace inflation in the near term, “indicating real wage gains for Canadian workers.”

Most respondents predict the Bank of Canada and the U.S. Federal Reserve will cut interest rates this year. For Canada, most expect a reduction of 25 to 50 basis points, less than the anticipated 75-basis-points or more reduction in the United States.

In markets, “the risk of a major correction in Canadian equity market appears to be small in 2007,” the survey showed.

Inflation is seen easing, while the Canadian dollar is expected to remain steady in the medium term.