The International Monetary Fund (IMF) has increased its global growth forecast for 2012 from 3.3% to 3.5%.

The Washington DC-based institution expects the Australian economy to expand by three per cent in 2012, and 3.5 per cent in 2013.

In its World Economic Outlook, released overnight, the IMF said the world outlook was gradually improving, but "downside risks remain elevated".

"Improved activity in the United States during the second half of 2011 and better policies in the euro area in response to its deepening economic crisis have reduced the threat of a sharp global slowdown," the IMF said. "However, the recent improvements are very fragile."

“Banking systems in [Australia and New Zealand] that have the greatest reliance on foreign wholesale funding remain vulnerable to deleveraging in the global financial system," it says.

"But a large external shock could bring these risks to the fore, precipitating a decline in investment and activity on China that would also have implications for its trading partners," it said.

Australian Treasurer Wayne Swan this morning noted the IMF's confirmation of Australia's strong economic fundamentals: solid growth, low unemployment, contained inflation, strong public finances and a record pipeline of business investment, but also noted the impact of ongoing global uncertainty and uneven conditions across domestic industry sectors.

“This further underscores the importance of returning the budget to surplus, and giving the Reserve Bank maximum flexibility to cut interest rates if it considers that is necessary. Clearly the uncertain global environment and structural changes in the economy will continue to impact on budget revenues, making the return to surplus in 2012-13 more challenging,” Swan says.

“However, considering the lax fiscal policy that has caused severe economic and social destruction in many advanced economies, delivering on the government's fiscal strategy sends a clear message about our strong economy and is our best defence in a changing global environment.”