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Which political party will the economy favour in 2013?

A Canadian housing bubble is about to burst, which will drag the Canadian economy to the brink of recession in 2013.

No, home prices will suffer only moderate declines at worst, and Canada can look forward to solid growth next year.

Whichever of these duelling forecasts turns out to be true will shape the politics of 2013.

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The bleak prognostication comes from David Madani, Canadian Economist at London-based Capital Economics.

In a note to clients Monday, the forecaster declared that "a potentially severe housing correction is underway" in Canada. As a result, "house prices will decline by 25 per cent over the next year or two."

Such a steep drop, combined with a sluggish global economy and softening commodity prices, will limit real growth in the Canadian economy to about 1 per cent next year, Mr. Madani said in an interview.

If the Americans go over the so-called "fiscal cliff" in January, that will further damage prospects for Canada. But even if the Americans avoid the worst, "there's still a chance that Canada might flirt with recession next year, simply because of the weakening that we're seeing in the housing market," he believes.

Craig Alexander, Chief Economist at TD Economics, is also worried about the fiscal cliff – the term for Draconian tax hikes and spending cuts that will kick in Jan. 1 unless Democrats and Republicans can reach a deal to smooth, rather than plunge into, deficit-fighting measures.

Then there's the possibility of a meltdown in Europe. The Chinese economy is faltering. And who knows what will happen if the Iranians get the Bomb?

But Mr. Alexander is optimistic that the Americans and the Europeans will muddle through, the new Chinese leadership will spur growth, and things will stay quiet on the Iran front.

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Canadian housing prices may decline, he believes, especially in Vancouver and in the Toronto condo market, but not nearly as severely as Capital Economics is predicting.

Best of all, "below the surface, what we're seeing are very clear signs that the American economy is healing," he said in an interview.

Put it all together and "the economic outlook is for moderate growth, contained inflation and low interest rates for a long period of time," Mr. Alexander predicts. He expects growth by the end of 2013 to be 2 ½ per cent or better.

If Mr. Alexander is right, Stephen Harper will happily attribute the good times to the Conservatives' economic stewardship.

If Mr. Madani proves to have the better crystal ball, the Prime Minister will point to outside causes for any recession and warn that only Conservatives can be trusted to guide the country through the latest bout of troubled times.

NDP Leader Thomas Mulcair will lay any blame for a recession at the door of the government, especially if Finance Minister Jim Flaherty resists a new round of stimulus measures, preferring to concentrate on fighting the deficit. Ditto the Liberal leader, whomever that may be.

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But sustained growth might also benefit the opposition. If people stop worrying about being laid off or seeing their home equity evaporate, the economy might recede as the top priority for Canadians.

In that case, people may start to focus on alleged vote-rigging, bungled fighter procurements, loosened environmental safeguards and other Tory foibles.

Bottom line: economic growth next year will be strong or weak, which could be good news or bad news for either the Conservatives or the opposition parties.

And that's my firm prediction.

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About the Author

John Ibbitson started at The Globe in 1999 and has been Queen's Park columnist and Ottawa political affairs correspondent.Most recently, he was a correspondent and columnist in Washington, where he wrote Open and Shut: Why America has Barack Obama and Canada has Stephen Harper. He returned to Ottawa as bureau chief in 2009. More


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