Certainly, the global economy has stabilised since the onset of the financial crisis, but the recovery is too weak for comfort.

A modest and fragile recovery is underway — and needs to change gears toward more rapid and sustainable growth. Unless countries come together to take the right kind of policy measures, they could be facing years of slow and sub-par growth — well below the solid, sustainable growth that is needed to create enough jobs and improve living standards into the future.

This is not inevitable. Now is the time for brave action. The global economy is turning the corner of the Great Recession, although overall growth remains too slow and weak. In 2013, global growth was about three per cent; we project modest improvements in 2014 and 2015, although still remaining below past trends.

Economic activity in the advanced economies is improving, albeit at varying speeds. This is good news, because for the past five years the emerging market and developing economies have been shouldering the burden of recovery — accounting for 75 per cent of the increase in global growth since 2009.

The recovery is finally becoming a bit more balanced, in an overall economic landscape that has changed significantly.

Activity in emerging market economies, which has been slowing, picked up slightly in the latter part of 2013 — driven by stronger demand from advanced economies.

Although tighter external financial conditions will be a drag on domestic demand, Asia in particular will continue to be a bright spot, posting the world’s highest growth rate of more than 6.5 per cent this year.

China also will continue to be a key driver, albeit at a slower, more sustainable pace. Many low-income countries too have been a bright spot. After Asia, sub-Saharan Africa has been the most dynamic region in the world during the crisis, growing at around five per cent per year on average.

In the advanced economies, growth is strongest in the US, supported by robust private demand and an easing of the short-term fiscal brake. Even so, it will be critical to continue to carefully manage the gradual withdrawal of monetary support by the Fed, and to put in place a durable medium-term fiscal plan.

In the Euro Area, a modest recovery is taking hold — stronger in the core but weaker in the South. Encouraging steps have been taken recently to establish a banking union — which the IMF has been urging for some time.

Implementing a common fiscal backstop remains key, as is the upcoming asset quality review of banks.

The first obstacle is that there is the risk of what I call “low-flation,” particularly in the Euro Area.

A potentially prolonged period of low inflation can suppress demand and output — and suppress growth and jobs. More monetary easing, including through unconventional measures, is needed in the Euro Area to raise the prospects of achieving price stability.

The second obstacle is in the emerging market economies. Corporate leverage has been rising, and there is a risk of heightened market volatility associated with the tapering of quantitative easing in the US.

This is combined with a generally less benign external financial climate. What we saw from the recent bouts of market volatility is that countries with weaker fundamentals — larger domestic and external imbalances — are likely to be more affected.

By the same token, strong policy responses by those economies are likely to be the best safeguard against turbulence. Navigating the choppy waters of financial normalisation will require a collaborative approach among all countries.

The third obstacle is the rise of geopolitical tensions, which could cloud the global economic outlook. The situation in Ukraine is one which, if not well managed, could have broader spillover implications.

There are also other cases of geopolitical tension. Resolving them requires not only good policies, but good politics. Both are essential to enable the global economy to move into a higher gear.

How do we reach cruising speed over the medium-term?

We know that the costs of continued sluggish growth are high: Modest income gains and meagre reductions in unemployment and inequality. Indeed, the risk is that without sufficient policy ambition, the world could fall into a medium-term low growth trap. How can we avoid this?

Fixing problems

We first need to fix problems that have been with us for some time during the crisis:

• Unemployment— far too many people are still out of work, especially young people;
• High levels of debt— meeting the challenge of fiscal consolidation while safeguarding growth; and
• Financial uncertainty— completing the reforms necessary to place the global financial system on a sounder footing.

While some progress has been made on each of these, none has yet been overcome.

Economic, fiscal, and monetary policies are a big part of the solution. But with space for supportive policies narrowing in many countries, the role of structural reforms as a policy lever will increase.

What does that mean in practical terms? It means more and better-targeted investment, more labour market reforms, and more product market and services reforms.

First, public investment has taken a hit over the years in many countries; higher, well-prioritised investment would increase potential output and jobs.

In Brazil, India, South Africa, more public and private investment is essential to close infrastructure gaps. Investment to upgrade existing infrastructure networks is also needed in a number of the advanced economies — for instance, in Germany and the US.

Second, inclusive labour market reforms can go a long way in boosting potential growth. In countries with ageing populations, increasing participation of under-represented groups can help to keep them dynamic.

In countries with high levels of youth unemployment or informality, labour market reforms can be critical in avoiding a lost generation.

Third, reforms to product markets and services can help break down vested interests, boost competition, and unleash huge growth and employment potential.

This is the case not only in advanced economies such as Japan or Germany, but also in emerging market economies such as China. Why? Because the innovation and productivity that underpin the services sector are the drivers of a modern economy.

Think technology, communications, or finance. These, in turn, depend on effective, accountable and rules-based institutions. In many ways, the world is at a critical juncture — emerging from the greatest financial crisis in almost a hundred years.

Recovery is taking hold but is too slow and it faces several obstacles along the road. Bold policy steps can overcome these obstacles and take the global economy to the next level of more rapid and sustainable growth.

Ms Lagarde is the MD of the International Monetary Fund