You wouldn’t know it given the noise from China and Greece, but the world economy is picking up steam.

Morgan Stanley predicted on Thursday global expansion of almost 4 percent in the second half of this year, up from 2.9 percent in the first six months.

The firm says monetary stimulus is taking hold and will even be extended by 18 central banks this year, enough reason for optimism despite it also forecasting a protracted slowdown in China and 75 percent risk of Greece leaving the euro.

“The strength of domestic demand in developed economies will be the key engine of growth,” Chetan Ahya and Elga Bartsch, Morgan Stanley’s co-chief economists, told clients. “We expect the global economy to continue on the path of gradual recovery.”

At Credit Suisse Group AG, economists are sanguine even as they detect a “faint whiff of panic” over China’s stock-market rout and the mounting prospect of Greece’s exit from the euro.

They nevertheless project improvements in the U.S. and Japanese economies alongside strengthening momentum in industrial production worldwide. A third consecutive gain in monthly new orders internationally is supporting their optimism as they reckon it’s the best lead indicator of demand for goods.

The upbeat tones stand in contrast to that of the International Monetary Fund, which this week said the world economy will grow 3.3 percent in 2015, below the 3.5 percent it estimated in April. Much of that reduction, however, was due to the U.S.’s weak first quarter.

David Fuller's view

I think they are right about GDP picking up.  Moreover, this is about the time one should be looking for some re-emergence of growth, a little over 6 years after economies troughed in 1Q 2009, following the worst credit crisis recession since the 1930s. 

If we are right, stock markets may remain choppy as we inch towards a normalisation of monetary policy in developed economies over the next two to three years.  However, we are unlikely to see more than sharp corrections, just like in the last two months, including some medium-term cyclical bear markets (20% plus) among developing markets. 

Those are acceptable risks for stock markets, particularly if you lighten positions following upward accelerations and buy after corrections such as we have seen recently.  Moreover many companies are doing better than economies, because they are benefitting from accelerating technological innovation, cheaper energy costs, low interest rates, globalisation and rapid increases in the world’s middle classes.  Twenty-five years from now, I believe we will look back and say these factors were the main drivers of a secular bull market in equities. 

The big risks are in government bonds, where yields are bottoming out following a secular bull market of approximately thirty-five years.