Confidence in the Canadian economy appears to be softening, among both consumers and economists. After months of GDP and employment growth – an environment the Bank of Canada has judged fit enough for one interest rate hike (and likely, a second this week) – there are fears we will be sideswiped by the unsteady global recovery.

This month’s edition of TNS Canada’s Consumer Confidence Index fell 4.5 points relative to June. Canadians are less optimistic, according to the marketing research firm. Its Expectations Index, which tracks our outlook on the economy, household income and employment in the next two quarters, fell for the fourth consecutive month.

“Canadians are worried and wary when it comes to Canada’s economic future,” said Michael Antecol, vice-president of TNS Canada. “The question has to be: Is it eventually going to sink the recovery?”

These jitters are not entirely understandable. Compared to other developed economies, ours has been a top-performer this year. “Last week, Statistics Canada reported businesses hired 51,900 workers in June, the fourth straight month of strong gains,” wrote Benjamin Reitzes, an economist at BMO Capital Markets on Friday. “Over that stretch, private-sector job growth was 7% annualized, the second best rate in 23 years.”

Forty per cent of Canadian businesses plan to increase their hiring in the next year, according to the Bank of Canada’s Business Outlook Survey published in Q2. And, notes Reitzes: “Machinery and equipment import volumes, which are closely correlated to business investment, surged 4.1% in May, and 47.2% annualized in the past four months, a six-year high … With solid employment growth powering consumers, and business investment now surging, Canada’s domestic economy still looks solid.”

Indeed, the fundamentals appear strong enough for the Bank of Canada to continue raising its key lending rate. Analysts are virtually certain that a 25-basis-point rate hike will be announced tomorrow, bringing the overnight rate to .75%. That would be the second hike this year.

But worries persist, and not without reason. Growth forecasts for the second half of 2010 pale in comparison to the first, though we are still probably looking at an annual growth rate north of 3%. Blame global economic pressures and a weakening domestic housing market.

“Canadian equity markets have been volatile in recent months, with the TSX falling by 7.5% from the end of April to the end of June, buffeted by concerns about sovereign debt and uncertainties about the global recovery,” wrote Grant Bishop, an economist at TD Economics on Friday.

This morning’s edition of The Globe and Mail features an important story that includes similar comments from David Rosenberg, chief economist & strategist at Gluskin Sheff + Associates Inc. “The mighty U.S. economy is slowing again, and with it Canada’s chances of escaping the global downdraft,” wrote Barrie McKenna.

In a note to investors, Rosenberg wrote this about the U.S. economy: “Only a fool or the most visually challenged can’t see that growth is moderating significantly … Canada too is softening and the cracks are starting to deepen in the housing market.”

Home sales plunged 8.2% in June, relative to the previous month. Compared to June 2009, sales were down 20%. Housing starts fell too: down 3.1% from May. That marked the second straight monthly drop. “Average home prices fell 2.5% on the month; however, are still up 5% year over year,” wrote Rosenberg. “Even if prices remain flat for the next few months, we estimate that year-over-year trends will be in negative territory by the fall.”

Rosenberg also noted that in June, the number of homes for sale reached its highest level since March 2009. “The deteriorating inventory situation could suggest that prices may decline instead of remaining stable over the coming months.”

The housing market takes us full-circle, of course. Home prices often drive consumer confidence significantly. And if current trends continue, we can expect to see TNS Canada’s Consumer Index fall further. That won’t be enough to sink the recovery, but it won’t float it either.