As the year 2018 begins, the world economy is gathering speed. The new World Economic Outlook Update revises our forecast for the world economy’s growth in both 2018 and 2019 to 3.9 percent.

For both years, that is 0.2 percentage points higher than last October’s forecast, and 0.2 percentage points higher than our current estimate of last year’s global growth.

This is good news. But political leaders and policymakers must stay mindful that the present economic momentum reflects a confluence of factors that is unlikely to last for long. The global financial crisis may seem firmly behind us, but without prompt action to address structural growth impediments, enhance the inclusiveness of growth, and build policy buffers and resilience, the next downturn will come sooner and be harder to fight.

Every government should be asking itself three questions today. First, how can we raise economic efficiency and output levels over the longer term? Second, how can we support resilience and inclusiveness while reducing the likelihood that the current upswing ends in an abrupt slowdown or even a new crisis? Third, how can we be sure to have the policy tools we will need to counter the next downturn?

Near-term prospects

Looking first at where we are now, how do we see the world economy in the near term?

The primary sources of GDP acceleration so far have been in Europe and Asia, with improved performance also in the United States, Canada, and some large emerging markets, notably Brazil and Russia, both of which shrank in 2016, and Turkey. Much of this momentum will carry through into the near term. The recent U.S. tax legislation will contribute noticeably to U.S. growth over the next few years, largely because of the temporary exceptional investment incentives that it offers. This short-term growth boost will have positive, albeit short-lived, output spillovers for U.S. trade partners, but will also likely widen the U.S. current account deficit, strengthen the dollar, and affect international investment flows.

Trade is again growing faster than global income, driven in part by higher global investment, and commodity prices have moved up, benefiting those countries that depend on commodity exports.

Even as economies return to full employment, inflation pressures remain contained and nominal wage growth is subdued. Financial conditions are quite easy, with booming equity markets, low long-term government borrowing costs, compressed corporate spreads, and attractive borrowing terms for emerging market and developing economies.

Explaining the upturn

The current upturn did not arise by chance. It began to take hold in mid-2016 and owes much to accommodative macroeconomic policies, which supported market sentiment and hastened natural healing processes.

Monetary policy has long been and remains accommodative in the largest countries, underpinning the current easy global financial conditions. Even though the United States Federal Reserve continues to raise interest rates gradually, it has been cautious, having wisely responded to the turbulence of early 2016 by postponing previously expected rate increases. The European Central Bank has started to taper its large-scale asset purchases, which have played a critical role in reviving euro area growth, but has also signaled that interest-rate increases are a more distant prospect.

Moreover, fiscal policy in advanced economies has, on balance, shifted from contractionary to roughly neutral over the past few years, while China has provided considerable fiscal support since its growth slowed at mid-decade, with important positive spillovers to its trade partners. In the U.S., of course, fiscal policy is about to take a markedly expansionary turn, with complex effects on the world economy.

Not the “new normal”

Our view is that the current upturn, however welcome, is unlikely to become a “new normal” and faces medium-term downside hazards that likely will grow over time. We see several reasons – to some extent reflected in our medium-term growth projections – to doubt the durability of the current momentum:

• Advanced economies are leading the upswing, but once their output gaps close, they will return to longer-term growth rates that we still expect to be well below pre-crisis rates. While we project advanced-economy growth of 2.3 percent in 2018, our assessment of the group’s longer-term potential growth is only about two-thirds as high. Demographic change and lower productivity growth pose obvious challenges that call for major investments in people and research. Fuel exporters face especially bleak prospects and must find ways to diversify their economies.

• The two biggest national economies driving current and near-term future growth are predictably headed for slower growth. China will both cut back the fiscal stimulus of the last couple of years and, in line with the stated intentions of its authorities, rein in credit growth to strengthen its overextended financial system. Consistent with these plans, the country’s ongoing and necessary rebalancing process implies lower future growth. As for the United States, whatever output impact its tax cut will have on an economy so close to full employment will be paid back partially later in the form of lower growth, as temporary spending incentives (notably for investment) expire, and as increasing federal debt takes a toll over time.

• As important as they have been to the recovery, easy financial conditions and fiscal support have also left a legacy of debt – government, and in some cases, corporate and household – in advanced and emerging economies alike. Inflation and interest rates remain low for now, but a sudden rise from current levels, perhaps due to procyclical policy developments, would tighten financial conditions globally and prompt markets to re-evaluate debt sustainability in some cases. Elevated equity prices would also be vulnerable, raising the risk of disruptive price adjustments.

• Despite rising growth in Europe, Asia, and North America, there is less good news in the Middle East and Sub-Saharan Africa; the latter area weighed down by the weakness of its larger economies. Low growth, driven in part by adverse weather events and sometimes combined with civil strife, has sparked significant outward migrations. Improvements in some large Latin American economies are notable but aggregate growth in the region will be weighed down this year by continuing economic collapse in Venezuela.

• Even though the recovery has lifted employment and aggregate income from crisis lows, voters in many advanced economies have soured on political establishments, doubting their ability to deliver broadly shared growth in the face of tepid real wage gains, reduced labor shares in national income, and rising job polarization. A turn to more nationalistic or authoritarian governance models, however, could result in stalled economic reforms at home and a withdrawal from cross-border economic integration. Both developments would harm longer-term growth prospects, to the detriment of those who have already fallen behind over the past few decades. Levels of inequality are high in emerging market and low-income economies, and carry the seeds of eventual future disruptions unless growth can be made more inclusive.

Policymakers must face the challenges

Perhaps the over-arching risk is complacency. While the current conjuncture might appear to be a sweet spot for the global economy, prudent policymakers must look beyond the near term.

No matter how tempting it is to sit back and enjoy the sunshine, policy can and should move to strengthen the recovery. Now is the time to build policy buffers, reinforce defenses against financial instability, and invest in structural reforms, productive infrastructure, and people. The next recession may be closer than we think, and the ammunition with which to combat it is much more limited than a decade ago, notably because public debts are so much higher.

An upswing so broad also furnishes an ideal moment to act on a range of multilateral challenges. These include countering global financial stability threats, including cyber-threats; strengthening the multilateral trading system; cooperation on international tax policy, including the fight against money laundering; and promoting sustainable development in low-income countries. Of especially urgent importance is to fight irreversible environmental damage, notably from climate change.

Against a backdrop of common priorities, the optimal policy mix differs across countries depending on cyclical considerations and available policy space:

• In advanced economies where output is close to potential, still-muted wage and price pressures call for a cautious and data‑dependent monetary policy normalization path. However, where unemployment is low and projected to decline further, such as in the United States, a faster pace of policy normalization may be required if inflation were to pick up more than currently anticipated. In advanced economies where output gaps persist and inflation remains below the central bank target, continued monetary accommodation is desirable. Fiscal policy in both cases should focus on medium-term objectives – including public investment to boost potential output and initiatives to raise labor force participation rates where gaps exist – while ensuring that public debt dynamics are sustainable and excessive external imbalances are reduced. Where fiscal consolidation is needed, its pace should be calibrated to avoid sharp drags on growth, while orienting policy toward boosting the quality of public health and education, and protecting the vulnerable, including those that may be adversely affected by structural transformation.

• In emerging market economies, improved monetary policy frameworks have helped lower core inflation, which provides scope for using monetary policy to support demand should activity weaken. Fiscal policy is generally more constrained by the need to gradually rebuild buffers, especially in commodity-dependent emerging market and developing economies. With the recent respite provided by the cyclical rebound in commodity prices, policymakers should guard against the temptation to defer reforms and budgetary adjustments for later. Exchange rate flexibility can complement domestic policy settings by preventing sustained misalignments in relative prices, facilitating adjustment to shocks, and curtailing the buildup of financial and external imbalances.

• The policy challenges for low-income countries are particularly complex, as they involve multiple, sometimes conflicting goals. These include supporting near-term activity; diversifying their economies and lifting potential output to maintain progress toward their Sustainable Development Goals; building buffers to enhance resilience, especially in commodity-dependent economies grappling with a subdued outlook for commodity prices; and tackling high and rising debt levels in many cases. Policy initiatives should continue to focus on broadening the tax base, mobilizing revenue, improving debt management, reducing poorly targeted subsidies, and channeling spending into areas that lift potential growth and improve the livelihoods of all (infrastructure, health, and education). Efforts to strengthen macroprudential frameworks and greater exchange rate flexibility would improve resource allocation, reduce vulnerabilities, and boost resilience.

Cooperative multilateral effort remains vital to safeguard recent momentum in global activity, strengthen medium-term prospects, and ensure the benefits from technological progress and global economic integration are shared more widely. Priority areas include continuing the financial regulatory reform agenda; avoiding competitive races to the bottom in taxes, labor, and environmental standards; modernizing the rules‑based multilateral trade framework; strengthening the global financial safety net; preserving correspondent banking relationships; curbing cross-border money laundering, organized crime, and terrorism; and mitigating and adapting to climate change.

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Regional growth forecasts

The aggregate growth forecast for the emerging markets and developing economies for 2018 and 2019 is unchanged, with marked differences in the outlook across regions.

• Emerging and developing Asia will grow at around 6.5 percent over 2018-19, broadly the same pace as in 2017. The region continues to account for over half of world growth. Growth is expected to moderate gradually in China (though with a slight upward revision to the forecast for 2018 and 2019 relative to the fall forecasts, reflecting stronger external demand), pick up in India, and remain broadly stable in the ASEAN-5 region.

• In emerging and developing Europe, where growth in 2017 is now estimated to have exceeded 5 percent, activity in 2018 and 2019 is projected to remain stronger than previously anticipated, lifted by a higher growth forecast for Poland and especially Turkey. These revisions reflect a favorable external environment, with easy financial conditions and stronger export demand from the euro area, and, for Turkey, an accommodative policy stance.

• In Latin America, the recovery is expected to strengthen, with growth of 1.9 percent in 2018 (as projected in the fall) and 2.6 percent in 2019 (a 0.2 percentage point upward revision). This change primarily reflects an improved outlook for Mexico, benefiting from stronger U.S. demand, a firmer recovery in Brazil, and favorable effects of stronger commodity prices and easier financing conditions on some commodity-exporting countries. These upward revisions more than offset further downward revisions for Venezuela.

• Growth in the Middle East, North Africa, Afghanistan, and Pakistan region is also expected to pick up in 2018 and 2019, but remains subdued at around 3½ percent. While stronger oil prices are helping a recovery in domestic demand in oil exporters, including Saudi Arabia, the fiscal adjustment that is still needed is projected to weigh on growth prospects.

• The growth pickup in Sub-Saharan Africa (from 2.7 percent in 2017 to 3.3 percent in 2018 and 3.5 percent in 2019) is broadly as anticipated in the fall, with a modest upgrade to the growth forecast for Nigeria but more subdued growth prospects in South Africa, where growth is now expected to remain below 1 percent in 2018-19, as increased political uncertainty weighs on confidence and investment.

• Growth this year and next is projected to remain above 2 percent in the Commonwealth of Independent States, supported by a slight upward revision to growth prospects for Russia in 2018.