The head of the International Monetary Fund has warned that the global economy is still in a "highly fragile" state following the financial crisis, and could face further turmoil in the months ahead.

Dominique Strauss-Kahn, managing director of the IMF, said the world economy was currently stuck in a "holding pattern", just over a year after the collapse of Lehman Brothers. He said it was essential that world leaders continue to work together, and argued it is too early to start reversing the various stimulus measures implemented around the globe.

"Financial conditions have improved but are far from normal," Strauss-Kahn told business leaders at the CBI's annual conference in London. "Signs show confidence returning, but banking systems in many advanced economies remain undercapitalised, weighed down by leaden legacy assets and, increasingly, underperforming loans.

"On the household side, weak financial positions and high unemployment will damp down on consumption for some time … and large public deficits add to vulnerabilities."

Strauss-Kahn said there were four key challenges facing world leaders – exit strategies, capital flows to emerging markets, sources of future growth and financial regulation.

Support for a Tobin tax?

Strauss-Kahn had recently ruled out a transaction tax on City profits, such as a new version of the "Tobin tax" which prime minister Gordon Brown is lobbying for.

Today, though, the IMF head softened his position – and even appeared to acknowledge Brown's efforts in this area.

"This is a very lively debate, and there are many good ideas being floated – especially here in the United Kingdom."

The G20 leaders have asked the IMF to examine the whole area of financial sector taxes. Strauss-Kahn said the issue is a "delicate balancing act" given the current weak state of the financial sector. But he also indicated that the current lack of agreement could be storing up future problems.

"There is no magic bullet, but one possible answer is to reduce regulatory uncertainty. Lay out the future requirements and the timescale for implementation. Right now, regulatory uncertainty is throwing up some perverse incentives – it might be encouraging a risk-taking culture, a Mardi Gras effect whereby financial institutions party now in expectation of lean times to come."

Staying on course

Despite its concern about public deficits, the IMF believes it is still too early to start unwinding the various efforts to stimulate economic activity.

"Exiting too early is costlier than exiting too late," Strauss-Kahn cautioned.

He argued that "progressive tax systems" might be needed to prevent the poor suffering when the time does come to start balancing the books. The IMF also thinks that central banks should raise interest rates before starting to reverse "unconventional methods" such as quantitative easing.

"Especially in many advanced economies, monetary policy can afford to stay accommodative for some time, given little sign of inflation on the horizon."

While the UK is still in recession, many emerging markets are now enjoying strong economic growth again. This is leading to a surge of capital into those countries, Strauss-Kahn warned.

"On one hand, we want capital to flow towards emerging markets … but these flows can clearly be destabilising. They could lead to exchange rate overshooting, asset price bubbles, and financial instability."

In the long term, the world economy needs sustained growth. According to Strauss-Kahn, we are on the verge of a new paradigm where China generates the demand that was once provided by consumers in countries such as America.

"Households in the United States and elsewhere propelled the global economy with their voracious appetite for consumption, soaking up imports from countries that relied heavily on exports to grow. In retrospect, this model had major fault lines – much of the consumption was financed by an addiction to cheap and easy credit, and this flow was turned off, cold-turkey style, by the financial crisis."