The global economic recovery remains on track, with the acceleration in growth underpinned by firming output and demand in high income countries. The economic cycle in most developing economies is also strengthening, in part due to support from stronger high income demand, although growth remains slower than during the pre-crisis boom period.
Risks to the outlook are less acute and more evenly balanced than in recent years. Policy and economic adjustments in the wake of last summer’s turmoil have narrowed current account deficits and reduced vulnerabilities in many middle-income economies. But adjustments are not yet complete and domestic vulnerabilities persist, while policy space to counter adverse shocks and support domestic activity in the face of adverse shocks is limited.
Developing countries need to gradually strengthen buffers to increase their resilience to external shocks, and need to more aggressively pursue structural reforms to ensure stronger growth in the medium term. Indeed in most developing countries, a further acceleration of growth (or even sustaining growth at current levels which are broadly in line with potential) cannot be assured without efforts to expand capacity. In most developing regions, demographic dividends from rising entrants into the labor force are fading as age dependency ratios increase, weighing on potential growth. For most of these countries, structural reforms are needed if they are to raise productivity and alleviate supply side bottlenecks.