2017 will be a year of 'economic nationalism'

Rating agency Fitch expects 2017 to be a year of "economic nationalism," with both Fitch and Deutsche Bank warning of the growing possibility of a trade war between the US and China.

Fitch predicts a decline in international trade in a note published on Tuesday, as governments focus on pumping investment into their own economies and embracing protectionist policies.

The rating agency says its prediction is driven by "the surge in populism and anti-establishment sentiment witnessed in the Brexit vote and Donald Trump's victory in the US presidential election."

President-elect Trump has promised a $1 trillion spending spree on US infrastructure as part of his campaign promise to "make America great again." UK Chancellor Philip Hammond last week announced a £23 billion of investment in British housebuilding, technology, and transport.

Fitch says these policies are likely to lead to a short-term boost in global and local GDP growth. The agency raises its growth forecasts for the US from 2% to 2.2% in 2017 and from 2.2% to 2.3% in 2018. The global forecast is also hiked from 2.8% to 2.9% in 2017.

But Chief Economist Brian Coulton warns in Tuesday's release: "In the long term, there is little doubt that increased trade protectionism and weaker migration flows would dampen growth in the advanced economies."

Fitch adds that there is "sizeable and increasing downside risks," meaning the there's a growing chance that things could go wrong and send economies spiralling off course.

The agency writes:

"First, the populist surge could exacerbate fragmentary tensions within the eurozone, with non-mainstream anti-EU parties gaining in popularity ahead of a series of key elections. Second, in the event of the US imposing punitive trade restrictions on China, retaliatory actions could see a trade or currency war develop. This would be highly damaging for global market sentiment and would reduce world growth."

Deutsche Bank raises the risk of a US-China trade war in a note sent on Monday, saying: "We need to think of the previously unthinkable as risk scenarios," in the wake of the Brexit and Trump votes. The investment bank says Trump may consider targeted tariffs on Chinese goods in a bid to reduce the trade deficit and "bring back jobs" to the US.

Deutsche Bank has already declared it believes the world has reached "peak" globalisation, supporting Fitch's forecast of a fall in global trade.

Fitch adds in its Tuesday note that there is "potential for a reversal of globalisation to push up prices in the advanced countries over the medium term." British think tank the Institute for Fiscal Studies last week warned that Britain is facing an "extraordinary and dreadful" wage crisis as a result of the expected return of inflation next year.