Analysis: Five Key Global Defence Budget Trends for 2015

16 December 2014

The annual IHS Jane's Defence Budgets End Of Year Report has revealed five key trends that will shape global defence spending in 2015:

1. The recovery in global defence expenditure will stall – temporarily

With further cuts required to government spending in the West and declining oil revenues dampening growth in the Middle East, defence expenditure may contract marginally in 2015.

Although defence expenditure returned to growth in 2014, a more cautious approach to further spending increases in recent key growth markets like Algeria, Oman and Saudi Arabia coupled with ongoing budgetary constraints in the West will see global military spending flatten out at around USD1.6 trillion. Nevertheless growth is expected to return in 2016 and be sustained for the remainder of the decade as fiscal consolidation efforts continue to ease in major developed economies.

2. Defence budgets will continue to fall in the West

With NATO still accounting for more than half of global defence expenditure, trends within the Alliance dictate the overall trend. The largest portion of NATO funding comes from the US. Given that the US Budget Control Act of 2011 set caps on defence spending through FY21, some constraints on US DoD spending will need to be considered going forward. The impact of both sequestration and declining Overseas Contingency Operations (OCO) funding drives the negative trend in the US as well as creating short term uncertainty. Further, with the outlook for NATO’s major European markets remaining negative in the short term, driven by continuing cuts in the UK, the outlook remains bleak.

3. Rapid growth in the Middle East and North Africa will come to an end as oil revenues slump

With defence spending having grown at an average annual rate of almost 9 per cent in real terms over the past three years, declining returns from the oil sector will temper short term growth in MENA.

With oil prices dipping below USD70 a barrel in December 2014 having been at a level of USD115 as recently as June, the short term fiscal outlook for producers in the MENA region has become significantly more constrained. While a number of key defence spenders in the region such as Saudi Arabia and the UAE are unlikely to cut spending substantially, regional spending is expected to be flat in 2015 as fiscal consolidation becomes a consideration in many countries.

4. Asia-Pacific will solidify its role as the key driving force behind future growth

Growth in Asian defence expenditure is expected to accelerate from 3.3 per cent in 2014 to 4.8 per cent in 2015.

Unlike in MENA, falling oil prices are expected to have a net positive effect and will aid government finances. Key regional markets have outlined plans for increases in military spending while growth in India and China is expected continue at rates above 5 per cent in real terms. The generally better performance of Asian economies coupled with ongoing strategic concerns are expected to sustain these rates of growth over the medium term, and as home to over a quarter of all global defence expenditure, this growth is expected to drive the global recovery in military spending.

5. Ukraine and Islamic State will continue to be a cause of flux

The repercussions of the Ukraine crisis and the emergence of IS will continue to be a cause flux in prevailing defence spending trends. Events in Ukraine have already shown signs of reversing recent negative defence budget trends in some Eastern European countries and have also impacted Russian spending plans. Meanwhile the open-ended timetable for the campaign against Islamic State (IS) will arrest declining operational spending in the West and create an impetus behind security concerns in the Middle East and further afield. Future development of each of these crises is likely to have a significant impact upon funding considerations over the short term.

Subscribers to IHS Jane’s Defence Budgets and IHS Jane’s Defence Industry & Markets Intelligence Centre can access the full report here: IHS Jane’s Defence Budgets End Of Year Report

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