The IMF explains this as follows:

“The global economy is in a synchronized slowdown, with growth for 2019 downgraded again—to 3 percent—its slowest pace since the global financial crisis. This is a serious climbdown from 3.8 percent in 2017, when the world was in a synchronized upswing. This subdued growth is a consequence of rising trade barriers; elevated uncertainty surrounding trade and geopolitics; idiosyncratic factors causing macroeconomic strain in several emerging market economies; and structural factors, such as low productivity growth and aging demographics in advanced economies.” 

In the graph below you can certainly see the slowdown in manufacturing since the beginning of 2018 and also that business confidence has been eroded.

The World Bank states in their report:

“Global growth in 2019 has been downgraded to 2.6% reflecting weaker-than-expected international trade and investment at the start of the year. Growth is projected to gradually rise to 2.8% by 2021, predicated on continued benign global financing conditions, as well as a modest recovery in emerging market and developing economies (EMDEs) previously affected by financial market pressure. However, EMDE growth remains constrained by subdued investment, which is dampening prospects and impeding progress toward achieving development goals. Risks are also firmly on the downside, in part reflecting the possibility of destabilizing policy developments, including a further escalation of trade tensions between major economies; renewed financial turmoil in EMDEs; and sharper-than-expected slowdowns in major economies.”

The Fed’s analysis is broken down into four sections.

The first one below is "Asset Valuations", which tries to gauge how expensive a particular market is. 

It cites three markets which look expensive; corporate debt, commercial real estate and farmland.

If you look at the spread, which is the additional income you receive to take US corporate bond risk,  these have been fairly small and falling through 2019. This is despite the fact that leverage has been increasing, which should certainly be a cause for concern.

The next section is "Leverage (borrowing) by businesses and households". The pattern here is that businesses have become more leveraged whereas household leverage isn't as extreme.

Business leverage is now historically high relative to gross domestic product (GDP) and the parts of the debt market which have been growing most rapidly are for the riskiest firms.

The report also says that household borrowing remains at a modest level relative to income.

You can see this in the top graph (below), where the darker line is non-financial business borrowing as a proportion of gross domestic product.  This has been gradually creeping up, then falling every time there's a recession and now it is at a level which is above where it was just before the global financial crisis.

You can also see from this graph that household borrowing relative to GDP has fallen.

In the bottom graph you can see the leveraged loan market. The top shaded bar shows you how much of the debt multiples are above six times (these are the most leveraged companies) and you can see that is has been gradually increasing since 2016.

The third section of the report is "Leverage in the Financial sector".

The Fed has made very sure that US banks have been strongly capitalised because they don't want to repeat what happened in 2009. Life insurance companies also haven't taken on too much leverage but hedge fund leverage is elevated relative to the past five years.

The Fed conducted a market outreach program where they asked several banks and fund managers what they consider to be the biggest risks. Trade frictions rated first with global monetary policy efficacy second. The question with monetary policy efficacy is whether low interest rates and quantitative easing will actually help the global economy.

Liquidity is also a concern e.g. how easy it is to sell assets in the event of a downturn.

Iran, further down the list, would  probably score more highly now given recent news.

The least worrying factors were a passive investing bubble, politics and household debt.

In the report the Fed also went on to cite the following tail risks:

• “European economies have notable financial and economic linkages with the United States, and a sharp economic downturn in Europe would likely spill over to the U.S. financial system.
• Adverse economic and financial developments in Europe could heighten uncertainty and lead to a sharp pullback of investors from riskier assets, amplifying market volatility and declines in asset prices.
• Stresses in European banks could also be transmitted to the U.S. financial system directly through credit exposures as well as indirectly through the common participation of globally active banks in a broad range of activities, including dollar funding markets.
• Moreover, the consequent dollar appreciation and lower global demand in the event of a sharp downturn in Europe would weaken the U.S. economy through trade channels, impairing the creditworthiness of U.S. exporting firms.
• The UK and the EU have agreed to a Brexit extension until January 31, 2020, but the risk of a no-deal Brexit in 2020, while diminished, still persists.
  
• A no-deal Brexit could trigger market and economic disruptions in Europe that might spill over to global markets, leading to a tightening of U.S. financial conditions.
• Should a no-deal Brexit cause distress in systemically important financial institutions in Europe, it would amplify the transmission of economic disturbances to U.S. and global financial systems.
• Because of the size of the Chinese economy, significant distress in China could spill over to U.S. and global markets through a retrenchment of risk appetite, U.S. dollar appreciation, and declines in trade and commodity prices.
• A prolonged period of rapid credit expansion in China has rendered its nonfinancial corporate sector highly vulnerable to a sharp downturn.
• In addition, poor asset quality and notable interconnections between banks and the large and weakly regulated shadow banking sector leave the Chinese financial sector vulnerable. 
• In this context, near-term risks such as an escalation in the trade conflict with the United States, a rapid adjustment in property prices, or a high-profile corporate default may trigger financial instability that could be transmitted globally.

If the US economy were to slow unexpectedly...

• profits of nonfinancial businesses would decrease, and, given the generally high level of leverage in that sector, such decreases would likely lead to financial stress and defaults at some firms.
• Investor risk appetite and asset prices may decline significantly in such a scenario, especially in markets such as high-yield bonds and CRE, where valuations are elevated.
• In addition to generating losses for the holders of the assets, a decline in asset prices could affect the financial system more generally either by impairing the ability of some financial institutions to lend or by inducing a wave of selling and redemptions of withdrawable liabilities."

A large amount of lending in China is by non-banking entities (the shadow banking sector) the size of which can be quantified with the total social financing number in the graph below. 

You can see from the graph that China has been trying to reduce the rate of growth of total social financing very gently to avoid popping their credit bubble.

However, The Bank of England still has concerns about the Chinese credit bubble popping. This is because of the strong linkages to the UK financial system where UK banks have a large exposure to mainland China.

Drilling into the corporate debt story, the Bank of England flagged the US as having a very high corporate debt to GDP ratio. They also flagged France as reaching its historical highs on that measure despite French authorities trying to address this problem.

Again we see that one of the worries for the Bank of England is US leveraged loans, where credit quality is deteriorating with over half of the leveraged loans issued in 2019 having very high debt to EBITDA.

EBITDA is the amount of debt a company has relative to its earnings before interest tax depreciation and amortisation and when it's above six then it's time to worry.

It is however reassuring to see that Italy's corporate indebtedness continues to fall.

Household and corporate credit growth isn't too bad in the euro area but the amount of sovereign debt in some countries, particularly Italy, is still an issue.

The sovereign debt crisis that we saw in Europe in 2012 has still not truly been resolved and there are still strong linkages between banks and sovereigns. If there was a sell-off in Italian government bonds it could severely impact Italian banks who hold a lot of that sovereign debt.

The ECB's has been very careful to make sure that the balance sheets of European banks now have more loss-absorbing capital than they did just before the financial crisis. The CET1 ratios (core equity tier 1, which is the regulator's core measure of a bank's financial strength) have now improved but this is partly due to a financing fiddle where the banks risk weights are being adjusted on their assets.

Given the weak GDP growth in the euro area, that doesn't sit well with companies increasing the leverage on their balance sheet.

Because of low interest rates house prices in many of the euro area countries are rising rapidly. Valuations are contingent on there being very low interest rates. As a consequence if interest rates do increase then this asset miss-pricing could cause a rapid correction. That correction will apply to the equity market which has benefited from low interest rates but also to gold and other safe-haven assets such as government bonds.

Negative yields have been a real problem for banks in the euro area and that has reduced their interest margin, which is the difference between the rate at which they lend and at which they borrow. The ECB thinks that return on equity could fall further in 2020.

Insurers still have fairly liquid assets but investment funds have been forced to buy the illiquid high yielding assets which could cause problems in the event of a market turnaround. Also almost three-quarters of insurance and pension funds bond holdings now yield less than 1% in the euro zone.

Although it's not such a large market, leveraged lending in Europe has also grown rapidly. At the same time the credit quality, which is called a covenant protection, has generally weakened. These are called covenant light loans and the percentage of new issuance of these has grown dramatically.

There has been a huge rise in non-bank lending in the United States since 2012. With a larger percentage of those loans having very high leverage and greater risk of bankruptcy.

Global Economic Outlook 2020 - Political Risks

Markets have been largely driven by the China US trade war. Whenever there have been signs of progress in the US China trade deal negotiations equity markets have rallied and bonds have sold off, but when there has been a deterioration in the relationship we have seen the opposite occur.

It looks like we're going to get a signing of the Phase One trade deal on 15th of January. Although that's promising it may open up a new front in the trade war with Europe.

Trump's decision to kill Qasem Soleimani could also have a very large impact depending on how Iran chooses to retaliate. A war in the Middle East certainly has the prospect of destabilising global financial markets depending on what the form of retaliation is and how the dispute escalates.

One source of dispute has been how much US tech giants pay in tax in Europe. The US has threatened trade tariffs in retaliation for those decisions in Europe and this has the prospect of triggering a new front in the trade war.

A more long-term worry is the effect of climate change on investment. The bushfire emergency in Australia is one example of this and what’s interesting is that now even central banks are also starting to talk about climate change.

The economic impacts of climate are very real. For example below is a lady who works in a museum who simply couldn't work because even inside the museum she was still affected by the smoke. It's hard to expect people to be productive if they can't breathe.

So while this isn't an immediate threat to investment, it's certainly something to consider as a longer-term risk.

In conclusion, the trend for the 2020 the economic forecasts seem to be one of slowing global growth.

The biggest red light at the moment in respect to tail risks seems to be too much borrowing in the US leveraged loan market, with too much triple B debt. In China there's the credit bubble which also has us worried but never quite seems to materialise.