Vanguard Chief Economist Joe Davis. Vanguard Chief Economist Joe Davis at Inside ETFs.

The near-term outlook for the global economy and most developed markets is moderate at best, but both look stronger in the longer term, according to Joe Davis, global chief economist at Vanguard and head of its Investment Strategy Group. 

The reason: productivity growth. It will expand through the global sharing of ideas and collaboration, said Davis, who spoke at the Inside ETFs conference underway in Hollywood, Florida.

This is not just wishful thinking on Davis’ part. Economist Paul Romer was awarded a Nobel Prize for his theory of the Economics of Ideas, which focuses on the snowball effect of ideas, especially in technology, leading to stronger growth.

Davis, along with the rest of Vanguard’s global economics team, studied more than 2 billion records from over 33,000 research publications across 1,000 industries in search of a leading indicator for innovation, tracing every idea from its beginning, where and who they came from, and screening for the most influential ones. 

What they found was what he calls the “Leading Idea Multiplier” to measure how many additional ideas each good idea generates, leading to innovations five to seven years in the future. 

The multiplier was 40:1 in 1980, nearly doubled in the 1990s, reached about 200 in 2003 and stayed there for years, suggesting the slower growth or “new normal” that has prevailed for about a dozen years. But in the past 18 months it has soared to 400, suggesting that contrary to conventional wisdom “globalization is actually accelerating” and will eventually lead to increased innovation, like the innovation seen in telecom and technology in the 1990s, said Davis. 

The four fields currently with the highest idea multiplier are advanced materials; transportation and energy; advanced manufacturing, including robotics; and health care, whose multiplier is greater than all of the other three areas combined (think CRISPR), said Davis.

These sectors indicate that the performance of value stocks will reignite and that not just large-cap companies will be competitive, according to Davis.

He stressed that the indicator does not show what’s to come in the next year or two but at least five to seven years. “Innovation takes time. … The new normal won’t end this year but in the next decade things will turn out better.”

When asked about risks to his outlook, Davis offered two: that there is a repeat of 1997, when the stock market was volatile but recovered only to crash several years later, or that the U.S. economy has a tough time recovering from the next recession because rates are currently so low. 

— Check out Is the World Getting Better? Vanguard Ran the Numbers to Find Out on ThinkAdvisor.