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And though corporate earnings reports released so far this quarter are showing encouraging signs, some investors’ expectations during the economic recovery were even higher.

After months of rallying, stocks have sunk sharply so far this year. The S&P/TSX composite index dropped about 1.6 per cent Friday, bringing the loss so far this year to about 5.6 per cent. The U.S. S&P 500 index is off about 3.7 per cent since the start of the year.

The increasing expectation for higher interest rates in Canada also plays into the outlook for the economy and stocks. Canadians have been rushing into the housing market, enjoying rock-bottom mortgage rates, while businesses are tapping credit at favourable rates. An upward move in the Bank of Canada’s overnight target rate could upset those trends, though some economists say a sharp upward surge is unlikely.

Governor Mark Carney last week opted to maintain the central bank’s commitment to leave the benchmark rate at 0.25 per cent until June, conditional on the outlook for inflation. The decision incorporated a forecast that Canada’s economy grew at an annual rate of 3.3 per cent in the fourth quarter.

The 0.4-per-cent increase in gross domestic product in November, combined with the one tenth of percentage point upward revisions in each of the previous two months, suggests GDP advanced at an annual rate of at least 4 per cent over the final three months of 2009. That might not be enough to push Mr. Carney off his intention to leave the benchmark rate alone until June, but it strengths the case to raise borrowing costs soon after.

“With the revisions, it’s a bit of a game changer,” said Derek Holt, chief economist at Scotia Capital in Toronto, who predicts Mr. Carney will begin lifting the benchmark rate in the third quarter, perhaps in July.

When discussing the future path Canadian interest rates, Mr. Carney’s June commitment has become the touchstone. Few think he wants to move sooner than that because all the slack left in the economy by the recession means there is no inflation pressure. So the debate mostly has been about how soon thereafter the interest rates will rise.

What’s changed is the confidence with which analysts such as Mr. Holt are betting on an interest-rate increase in the third quarter.

Up until recently, those predictions tended to be couched as best guesses because the recovery in the U.S. was so uncertain.

But Friday, economists, who are notoriously stubborn about changing their predictions, found themselves boosting their outlooks for Canada. Among them were analysts at CIBC World Markets and BMO Nesbitt Burns, both of whom predicted the economy would grow at a 4-per-cent annual rate in the fourth quarter.

“The timing of the rate increase could be earlier, no matter when you thought it was going to be,” said Michael Gregory, at senior economist at BMO Nesbitt Burns, which also lifted its estimate for fourth-quarter growth to an annual rate of 4 per cent. “The strength in the economy doesn’t seem to justify an emergency level of interest rates,” said Mark Chandler, a fixed-income strategist at RBC Capital Markets, who said Mr. Carney will lift interest rates in the third quarter.