The International Monetary Fund has published its World Economic Outlook for this year, in which it says growth prospects have improved again, but the road to recovery in the advanced economies remains bumpy.

In particular it urges the Euro Area countries to make rapid progress towards a banking union and to sort out the region's banking problems, which are holding back recovery and growth.

The IMF forecasts global economic growth at 3.25% this year and 4% next year, led by strong growth in emerging economies in Asia and South America.

The US will lead recovery among the advanced economies, with growth forecast at just under 2% this year and 3% next year.

But the IMF said the Euro Area will record negative growth this year, and just over 1% positive growth next year, with growth held back by problems in the banking sector.

The IMF says activity is beginning to recover after last year's slowdown. It says strong actions by European policy makers did help to improve confidence and financial conditions.

In the US, policymakers avoided the fiscal cliff, but failed to find solutions to other short term fiscal risks, particularly the budget sequester, which if left unchanged will lead to what the fund calls "excessive consolidation" in the federal budget, with damaging consequences for growth.

Avoiding the fiscal cliff and avoiding the breakup of the euro were hailed by the fund as a successful defusing of two of the biggest threats to the global recovery, but it warned of old dangers remaining, and new ones emerging.

In particular it is worried about the fallout from the Cyprus bailout programme, and from the outcome of the Italian elections, which has failed to produce a government.

While borrowing costs for Euro Area peripheral governments have fallen relative to German rates, and some countries such as Ireland have been able to place significant amounts of long-term debt with the markets for the first time in over two years, the volatility of peripheral yields in the wake of the Cyprus and Italy situations indicate continued fragility.

It warns that continuing stagnation in the Euro Area, insufficient institutional reform and adjustment fatigue are the main medium-terms risks facing European economies.

The IMF report contrasts the more rapid recovery in the US - where the emphasis was on fixing the banking sector, but which allowed government debt to rise - compared with the EU, where the opposite was the case.

It says "relative to US banks, Euro Area banks have made less progress in rationalising their balance sheets, cutting administrative costs, and rebuilding profitability and capital. In addition they remain too dependent on wholesale funding."

In a point that will have particular resonance in Ireland, the IMF says that "households and non-financial corporates are likely to require some help in restructuring debts to banks, compared with targeted restructuring policies, traditional bankruptcy has many drawbacks in a deep downturn".

It urges policymakers to consider "viable alternatives to default and closure, while avoiding distortions to competition from zombie enterprises". It says debt for equity swaps and working capital support could be considered.

In the US, the rate of credit growth has been picking up gradually, and bank lending conditions have been easing slowly from very tight levels.

This has noticeably eased financial conditions - a process supported by recovering house prices, higher household net worth, and stronger bank balance sheets and profitability.

However many middle income families still face high debt burdens.

Euro zone firms facing uncertainty and low demand 

In the Euro Area, the IMF says sustained positive feedback between credit and economic activity seems a distant prospect.

Euro Area credit continues to fall, and credit conditions continue to tighten. It said this mainly reflects conditions in the peripheral countries, like Spain and Ireland, but also reflects poor macroeconomic conditions for the region as a whole.

It said that in the euro zone core, companies face uncertainty and low demand, while in the periphery companies and households continue to struggle with weak balance sheets and falling incomes.

As a result the IMF foresees a continuation of low interest rates from key central banks for several years to come, which it expects will slowly translate into more dynamic bank lending, assuming financial stability risks continue to reduce.

It warns this process will take much longer in the Euro Area than the US.

In the US, fiscal policy will be tighter than it was last year, but will be looser in the Euro Area, where deficits have been reduced much more than in the US or Japan.

It says the pace of consolidation will drop to three quarters of a percentage point of GDP this year, compared with a 1.5% consolidation last year, with Germany moving from structural tightening to a slight loosening.

In the UK, fiscal consolidation is now forecast to be slower than previously expected.

The lower rate of consolidation will help the Euro Area economy to gradually pick up, with less fiscal drag and improved lending conditions.

But output will still contract by about 0.25% because of continued fiscal adjustment, financial fragmentation and balance sheet adjustment in the periphery.

The forecast assumes things do not get any worse in the Euro Area, and that governments make rapid progress on creating a banking union, which was the main agenda item at last weekend's EcoFin meeting in Dublin.