By Nick Mann | 13 April 2012

The global economy has improved but more needs to be done to build on the ‘fragile’ recovery, according to the International Monetary Fund.

Managing director Christine Legarde said the improved financial situation in Europe and positive signs in the US provided ‘an opportunity to push on and take the further actions that are certainly needed to keep the crisis at bay and finally put it behind us’.

She called for a new type of ‘equitable’ and ‘inclusive’ growth, along with greater reform of the financial sector, to restore competitiveness and build better labour markets.

The ‘sometimes wrenching’ changes needed meant the social fabric was ‘in danger of being stretched’, she said, and countries needed to reinforce safety nets for citizens.

Deficit reduction was still essential but in the short term governments should focus on building the demand and confidence needed for economic growth.

‘Yes, some countries have no choice but to adjust now, sharply and quickly. But that is not true across the board,’ she told an audience at the Brookings Institute in Washington DC. ‘Other advanced economies can be more gradual in reducing deficits – they can allow automatic stabilizers to operate, letting tax revenues fall and spending rise if their economies weaken.

‘Others still have the flexibility to reconsider the pace of deficit reduction this year, to limit the harm to growth.’

Yesterday, the Organisation for Economic Co-operation and Development said spending cuts and revenue-raising policies had to be balanced with the effects they had on growth.

But Legarde said short-term caution was no excuse for delaying efforts to restore sound public finances. Including adjustment in ‘credible medium-term plans’ in countries such as the US and Japan would help to reinforce confidence and growth as well as address fiscal concerns.

Legarde also welcomed the actions taken to build a European firewall, which she said were a ‘timely reminder of the power of policy resolve and action’.

She added: ‘These actions will help, slowly but surely, to restore confidence and reduce vulnerabilities. But we also need a broader approach – and a stronger firewall – if we are to push back this crisis.’

This global firewall would help complete the ‘circle of protection’ for every country, she said, repeating her call last week for more funding for the IMF.