(Bloomberg News) The world economy is sliding into a "twilight zone," trapped between outright expansion and renewed recession.

"It could go either way," said Joachim Fels, chief economist at Morgan Stanley in London, who coined the description in an Aug. 15 report. "It doesn't take much to tip us into a global recession."

The quandary is forcing central banks back to the fore, with the Federal Reserve last week embarking upon a third round of quantitative easing and the European Central Bank standing ready to buy bonds. While the moves were enough to propel the Standard & Poor's 500 Index to its highest since 2007, the test is whether they can lift the global economy from its so-called stall speed.

"Markets make fabulous economists, so a rally is often followed by a pick-up in the economy; but there's likely to be a consolidation as softer data arrives in the near term," said Trevor Greetham, who helps manage the equivalent of $225 billion as director of asset allocation at Fidelity Worldwide Investment in London. "There's a two-way tension."

That tension is reflected in the calls of equity strategists, who divide between those unnerved enough by the opaque economic outlook to shun stocks and those declaring stimulus and liquidity as reason to buy them. Morgan Stanley predicts a 20 percent decline in the S&P 500 to 1,167 through December. Credit Suisse Group AG forecasts gains will be sustained, and the U.S. benchmark will end the year at 1,500. The index was 1,461.19 at 4 p.m. yesterday in New York.

'Recommend Buying'

"If central banks believe that QE works, and these benefits outweigh the costs, they will continue to pursue it," Andrew Garthwaite, a global equity strategist in London at Credit Suisse, said in a Sept. 14 report. "We recommend buying."

The warning from Morgan Stanley, echoed by Citigroup Inc. and Pacific Investment Management Co., is that even with central bank support, the recent slowdown means growth is around the level at which it could suddenly evaporate into recession. That leaves economies increasingly vulnerable to a slump-inducing shock as Europe's debt crisis festers, the U.S. nears its fiscal cliff and emerging markets slow.

The deceleration leaves central banks as first responders, even amid questions about the power and scope of monetary policy to provide much more strength after most benchmark interest rates have been cut to record lows and officials have embarked upon asset purchases.

Expand Holdings

The Fed last week said it will expand its holdings of long- term mortgage securities -- this time without limit -- and probably hold the federal funds rate near zero "at least through mid-2015," longer than its previous pledge. The ECB this month agreed to buy the bonds of governments that accept austerity conditions in return. Chinese Premier Wen Jiabao said Sept. 11 the world's second-largest economy has room for monetary and fiscal measures.

Fels predicts the central banks of the euro area, China, U.K. and Japan will be among those easing monetary policy even further. In doing so, they will support asset prices, prevent deflation, help avert sovereign defaults and maintain some economic growth, he said.