The outlook for global economic growth has improved a bit, but vulnerabilities remain, according to the latest forecast from the International Monetary Fund.

The IMF said Tuesday that it expects global growth to slow to 3.5% this year, from 4% last year, before picking back up to 4.1% in 2013 (forecasts that are slightly higher than its January outlook). The potential for a sharp slowdown has been curbed by stronger second half 2011 growth in the United States, and policy actions to stabilize Europe, it notes. However, it cautions that the recovery remains fragile.

Indeed, it still expects a mild recession in Europe this year due to the sovereign debt crisis, weak confidence, the effects of de-leveraging, and fiscal consolidation. This will, in turn, weigh on the advanced economies generally, keeping overall growth to just 1.5% this year, and 2% next year, it predicts.

For Canada, the IMF predicts 2.1% growth this year and 2.2% next year, an increase of 0.3 and 0.2 percentage points, respectively, from its January forecast.

Emerging economies are expected to deliver much stronger growth of 5.75% this year, although that represents a slowdown from 6.25% last year; before also picking up next year to 6%.

The IMF cautions that downside risks remain and could yet flare up without further policy action. Further escalation of the euro area crisis is the biggest immediate concern. But it also warns that geopolitical uncertainty could trigger a sharp increase in oil prices, which would lower global output, or excessively tight macroeconomic policies could push another of the major economies into sustained deflation or a prolonged period of very weak activity. Other, latent risks include disruption in global bond and currency markets as a result of high budget deficits and debt in Japan and the US, and rapidly slowing activity in some emerging economies.

On the upside, it says that growth could also be better than projected if policies improve further, financial conditions continue to ease, and geopolitical tensions recede.

“Policies must be strengthened to solidify the weak recovery and contain the many downside risks. In the short term, this will require more efforts to address the euro area crisis, a temperate approach to fiscal restraint in response to weaker activity, a continuation of very accommodative monetary policies, and ample liquidity to the financial sector,” it says.

Looking further out, the IMF says that the challenge is to improve the weak medium-term growth outlook for the major advanced economies. And the most important priorities there remain fundamental reform of the financial sector; more progress with fiscal consolidation, including ambitious reform of entitlement programs; and structural reforms to boost potential output.