Australia Markets closed

Davos ends with warnings on economy

The crisis mood is gone, but that doesn't mean we can slip back into our old ways - that's the message from top international finance officials wrapping up the World Economic Forum in Davos, Switzerland.

They warned governments on Saturday against letting their relief over an improved economic climate turn into complacency over reforms many want to see in order to sustain a still-uncertain recovery.

"Do not relax," International Monetary Fund (IMF) head Christine Lagarde urged at a closing panel on the economic outlook.

She said the IMF outlook for a "fragile and timid" recovery depended on officials in the powerhouse economies of Europe, the US and Japan making "the right decisions".

Her comments came at the end of the gathering of 2500 business, financial and political leaders that took place in a more upbeat atmosphere than last year.

Fears over the break-up the euro currency union have abated, while the US has avoided the so-called "fiscal cliff" of automatic tax increases and spending cuts that threatened to push the world's largest economy back into recession.

With those bullets dodged, there are fears that governments may ease up on the measures to improve growth and reduce debt that many institutions such as the IMF are calling for.

The IMF estimates that the world economy will grow about 3.5 per cent this year, modestly better than last year's 3.2 per cent. Yet the improvement is uneven. The eurozone and Japan are in recession, but the US is growing, and emerging economies such as China are expanding much more quickly.

The developed world is still recovering from the shock of the financial crisis, which began in 2007 when US banks revealed heavy losses related to mortgages handed out to people with shaky credit. With banks around the world teetering, the world economy slid into deepest recession since World War II and the recovery since has been unspectacular.

Like last year, Europe and specifically the debt problems of the 17 European Union countries that use the euro, was a key focus in Davos.

Lagarde said officials in Europe have to see through reforms to prevent failed banks from adding to government debt through bailouts. Progress towards a "banking union" that would impose tougher, centralised supervision of banks to ward off failures and bailouts has been slow.

Lagarde said the eurozone was still in "a very fragile situation" that was made more risky through a slow decision-making process and occasional backtracking on initiatives.

In addition, she said US has to sort out its budget dispute between Congress and President Barack Obama. Up against a New Year's deadline, the two sides put off much of their dispute for a few months.

"Good decisions have been made," she said. "Sometimes at the last minute, as in the United States, sometimes laborious and confusingly as in the eurozone," she said. "In 2013 they have to keep up the momentum.