A delicate equilibrium: IHS Jane's annual defence spending review

Transcription

1 Jane's Defence Weekly [Content preview Subscribe to IHS Jane s Defence Weekly for full article] A delicate equilibrium: IHS Jane's annual defence spending review The year 2014 represented an important milestone for the global defence industry, marking the end of an extended period of defence budget cuts. The IHS Jane's Defence Budgets team reports Global defence expenditure in 2014 increased for the first time since 2010, rising by 0.85% in real terms to USD1,597.1 billion. Although military spending is expected to remain largely flat in 2015, the post-financial crisis trend of successive annual cuts appears to have been broken. The conclusion to the extended period of reductions in military spending seen over the past five years can, however, perhaps be more accurately interpreted as the attainment of a delicate equilibrium. While strong budget growth was apparent in the Middle East and North Africa (MENA), Russia, and to a lesser extent in Asia, the increase in global terms can largely be attributed to a slowdown in the rate at which the US budget fell, rather than a true acceleration of global growth across the board. While additional resources were allocated to defence in absolute terms, the trend towards lower military expenditure as a proportion of GDP also continued, with total global spending falling from 2.15% of GDP in 2013 to 2.1% in Based on current projections, in 2016 overall spending will fall below the 2% of GDP threshold - which NATO theoretically holds as a standard level of investment - and will continue to fall over the remainder of the decade. As such, the increases in military spending at present are in line with economic trends and certainly do not provide any evidence of a shift towards a prioritisation of defence. Global defence expenditure, (IHS) Article 1 Page 1 of 10

2 Regional breakdown of 2014 spending - USD1,597.1 billion. (IHS) Article 1 Page 2 of 10

3 US and NATO Despite the initiation of operations against IS, overall the US defence budget - the only budget of a scale capable of dictating global trends - has declined from its fiscal year 2010 (FY 2010) peak of USD743.3 billion. This is primarily due to the steep decline in Overseas Contingency Operations (OCO) funding as combat operations wound down in Afghanistan. While the base budget has remained stable at USD496 billion in nominal terms between FY 2013 to FY 2015, OCO has fallen from a high of USD186.9 billion in FY 2008 to USD64.3 billion in FY 2015, making the total request for FY 2015 USD560.4 billion. While the base budget is expected to see nominal terms increases from FY2016 onwards, declining OCO spending is expected to cause a further real-terms degradation in the overall budget request through to FY 2020 as the US reduces its troop strength in Afghanistan and faces continuing pressure from sequester reductions, which are likely to restart in FY Even so, while the well-publicised cuts in the Pentagon's budget in recent years have largely driven the negative global trend, the United States continues to dominate military spending, accounting for 36.7% of global expenditure. The challenging budgetary conditions are also distinctly apparent across the Atlantic, where defence spending has also continued to shrink among NATO's major Western European powers. Regional spending totalled USD262.7 billion in 2009 and has contracted by 2% on average every year, falling to USD237.7 billion in Defence budgets in the five largest Western European markets (the United Kingdom, France, Germany, Italy, and Spain) decreased by 2.3% in 2014, while spending is expected to continue to contract in 2016 and 2017, driven by further cuts in the United Kingdom and, to a lesser extent, Italy. The UK defence budget, the largest in NATO aside from the US, has been cut by an average of 3.6% every year since 2009 and is expected to continue to fall until at least Having largely worked through the effects of the restructuring and budgetary cuts imposed by the 2010 Strategic Defence and Security Review (SDSR), the UK armed forces await the publication of the 2015 SDSR with some trepidation. A further rebalancing of force levels with additional reductions in overall defence expenditure appear highly likely given ambitious targets to reduce the fiscal deficit set out in the Treasury's 2014 Autumn Statement. In response to the crisis in Ukraine, a number of NATO's new Eastern European members announced intentions to increase defence spending to the alliance's threshold target of 2% of GDP. Announcements made in 2014 by Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Romania, and Slovakia - several of which were made at September 2014's NATO summit in Cardiff - indicated that defence spending would be increased among the alliance's new members and were welcomed by partner states. Nevertheless, this additional resource will not be sufficient to offset cuts among the larger NATO members, while the ability of these countries to implement the increases to their full extent is still in question. Article 1 Page 3 of 10

4 Fastest declining markets, (IHS) Middle East and North Africa In direct contrast to prevailing trends in the West, expenditure in MENA has expanded rapidly over the past three years, led by huge budget increases in Algeria, Oman and Saudi Arabia. Between 2011 and 2014 regional spending increased by 29.6% in real terms from USD108.5 billion to USD140.2 billion: by far the largest proportional increase in defence spending of any region over the period. Military budgets in MENA now account for 8.8% of the global total compared with 6.9% in The growth was primarily the result of an apparent acceleration in procurement activity, with related spending increasing by 49.7% in real terms to USD25.9 billion. Although this period of increased investment in equipment acquisition can be partially explained by delays to a number of programmes in 2009 and 2010 as social and internal security policy became the focus of many governments, the drive was facilitated by increased energy revenues. The level of investment in missile defence systems over the course of 2013 and 2014 provides a clear indication that procurement growth has also been motivated by specific security concerns. While procurement activity is expected to slow in the short term, there can be little doubt that equipment acquisitions will continue where they are deemed to be essential requirements based upon emerging threats in the region. Article 1 Page 4 of 10

5 Fastest growing markets, (IHS) Asia The outlook in Asia appears both more positive and more stable. Spending in the Asia-Pacific region is expected to grow from USD415.6 billion in 2014 to USD547.1 billion by 2020: more than 30% of the global total. The region has already seen its share of total global expenditure rise from 21.6% in 2009 to 26% in 2014 driven by China, India, and resurgent growth in the emerging markets of Southeast Asia. By 2020 combined defence spending in the Asia-Pacific region is expected to draw level with, and surpass, that of the United States and be more than twice that of the European Union (EU). While Asia's economic expansion will continue to form the foundation of further growth in military spending, strategic concerns have also motivated increased investment in defence in a number of countries. Despite the continued gradual slowdown in Chinese economic performance, Beijing announced a 12.2% nominal terms increase in its defence budget in February 2014: the largest increase since While growth on such a scale has been common since the 1990s, when combined with China's more assertive stance in the region this has contributed to Japan's decision to increase its core budget in 2014 and to request record spending for In July 2014, India's core defence allocation for FY was revised upwards to INR2.29 trillion (USD38.8 billion) in the first budget of the new Bharatiya Janata Party (BJP) government, providing further evidence that the new government is intent on bolstering the Indian military and more specifically on accelerating procurement activity. While growth in the South Korean defence budget fell to its lowest level for five years in 2014, the budget for 2015, finalised by the National Assembly in December 2014, suggests that growth will accelerate again to 4.9%. Based on current government projections, South Korea will surpass Australia to become the fourth-largest spender on defence in the Asia-Pacific region in 2015, behind China, Japan, and India. Article 1 Page 5 of 10

6 Indonesia also continues to emerge from a period of chronic underfunding and has seen its defence budget expand rapidly over the past five years. While the 2015 budget - an increase of 14% in nominal terms to INR95 trillion (USD8.1 billion) - remains open to revision by the new government in Jakarta, newly elected President Joko Widodo has reiterated the government's intention to increase Indonesian defence expenditure to 1.5% of GDP over the next five years from 0.9% at present. Russia While the scale of budget increases in Russia has been a driver of global growth since 2011, the deterioration in Moscow's economic and fiscal outlook looks set to remove this stimulus to defence spending over the coming years. While the Russian defence budget increased by 17.8% in the fourth consecutive year of double digit growth - to reach RUB2,475.4 billion (USD54.4 billion), events over the course of the year have placed substantial obstacles in the way of plans for future growth. Although defence expenditure looks set for a further significant increase in 2015, the economic repercussions of Moscow's actions in Ukraine, combined with a precipitous fall in the price of oil over the course of 2014, look set to derail previously announced spending plans for 2016 and With about half of government revenues generated by the oil and gas sector and the price of oil falling below USD60 a barrel in early 2015 against budget assumptions of USD100 for , fiscal pressures are set to escalate significantly. Latin America Perhaps more unexpectedly, military budgets have also come under pressure in Latin America as a result of a weakening short-term economic outlook. Expenditure fell by 3.1% in 2014 to about USD71.6 billion as GDP growth slowed and both Argentina and Venezuela saw their economies contract. The region also saw its share of global spending fall marginally to just under 4.5% of the global defence market from 4.7% in 2013, with spending falling as a percentage of GDP in a number of countries. Chilean spending at USD5.6 billion reached a low of 1.9% of GDP in 2014, having peaked at 2.9% in Colombia's relative success in its counterinsurgency campaigns has also led to a lessening in the emphasis placed on defence in the state budget, with expenditure on the military expected to drop below 2% of GDP by Outlook While trends have differed significantly from region to region and country to country, the end to an extended period of defence budget cuts certainly represents an important milestone for a global defence industry that has had to deal with the dual pressures of a shrinking market and increased competition. Western manufacturers in particular have faced significant challenges as their home markets have declined. As recently as 2010 the United States, United Kingdom, and France accounted for 53.5% of all Article 1 Page 6 of 10

7 global spending with total defence expenditure of USD884.0 billion a year; however, just five years later in 2014 these figures dropped to 44.6% and USD712.7 billion and are expected to continue to fall. The difficulty for Western suppliers is that, while spending stopped falling in global terms in 2014, the defence budgets of their home nations have continued to fall. The proliferation of naturally smaller growth markets in Asia and elsewhere has also served to fragment spending, increase competition between traditional suppliers and boost emerging competitors. Although defence expenditure returned to growth in 2014, a more cautious approach to further spending increases in recent high-growth markets like Algeria, Oman, and Saudi Arabia, coupled with ongoing budgetary constraints in the West, is expected to cause global military spending to flatten out at about USD1.6 trillion in Nevertheless, growth is expected to gradually accelerate from 2016 and be sustained for the remainder of the decade as fiscal consolidation efforts continue to ease in major developed economies. In the longer term, Jane's Defence Budgets expects global defence spending to surpass its previous 2010 peak of USD1,661.7 billion before the end of the decade. Global investment expediture ( ). (IHS) Copyright IHS Global Limited, 2015 For the full version and more content: IHS Jane's Defence Industry and Markets Intelligence Centre This analysis is taken from IHS Jane s Defence Industry & Markets Intelligence Centre, which provides world-leading analysis of commercial, industrial and technological defence developments, budget and programme forecasts, and insight into new and emerging defence markets around the world. IHS defence industry and markets news and analysis is also available within IHS Jane s Defence Weekly. To learn more and to subscribe to IHS Jane s Defence Weekly online, offline or print visit For advertising solutions contact the IHS Jane s Advertising team Article 1 Page 7 of 10

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