LONDON: Defence spending is forecast to flat-line globally over the next two years as fiscal constraints among oil producing states in the Middle East and North Africa remove a key source of growth.
The new analysis, released by IHS Inc. (NYSE: IHS), the leading global source of critical information and insight, features global, regional and country-specific forecasts for defence expenditure, procurement, research and development across 91 countries and captures 98 percent of global defence spend.
By 2019, for the first time in history, NATO will not account for the majority of worldwide defence expenditure, having accounted for almost two-thirds of global spending as recently as 2010; by 2020, defence spending in Asia Pacific will exceed that of the US, if sequestration continues; at present the US outspends the region by $170 billion; rapid growth in the Middle East and North Africa will come to an end as oil revenues slump; despite a two percent cut in 2014, the UK resumed its position as the third highest spender on defence above Japan, Russia, and France, due to Russian currency depreciation; Russian defence spending is forecast to reach its peak of USD62.6 billion in 2015; India is forecast to become the third largest defence market by 2020.
NATO expenditure is expected to fall in real terms from USD869.6 billion in 2014 to USD837.9 billion by 2020. By the end of the decade, spending will decline from 54.4 percent of total spend to 48.5 percent.
“By 2019 the alliance will fail to account for the majority of worldwide defence expenditure for the first time in its history having accounted for almost two-thirds of global spending as recently as 2010,” Fenella McGerty, senior defence budgets analyst at IHS Aerospace and Defence, said.
“Spending in Asia Pacific meanwhile is expected to grow to USD547.1 billion by 2020, over 30 percent of the global total,” Craig Caffrey, senior defence budgets analyst at IHS Aerospace & Defence, said.
Despite not being immune to the challenges in the global economy, growth in Asian defence expenditure is expected to accelerate from 3.3 percent in 2014 to 4.8 percent in 2015. Unlike in the Middle East and North Africa, falling oil prices are expected to have a net positive effect upon economic growth in China, India and Indonesia and will aid government finances.
“By 2020, the centre of gravity of the global defence spending landscape is expected to have continued its gradual shift away from the developed economies of Western Europe and North America and towards emerging markets, particularly in Asia,” Caffrey said. “In terms of overall growth in each region between 2015 and 2020, Asia Pacific is expected to solidify its role as the key driver of growth in the defence sector.”
By 2020, defence spending in Asia Pacific will exceed that of the US if sequestration continues; at present the US outspends Asia Pacific by USD170 billion.
Since Asia Pacific is now home to over a quarter of all global defence expenditure, growth in this region is expected to drive the global recovery in military spending.
Expenditure in the Middle East and North Africa 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 percent in real terms from USD108.5 billion to USD140.2 billion, the largest proportional increase in defence spending of any region over the period,” Caffrey said.
Given the generally higher levels of dependency of the Gulf States on energy revenues, sustained increases in defence expenditure among the GCC states have tended to follow increases in oil prices. Declining returns from the oil sector will temper short term growth in the region. With oil prices dipping below USD65 a barrel, the short term fiscal outlook for producers in the Middle East and North Africa region has become significantly more constrained.
IHS expects a further USD7.5 billion degradation in the defence budget request through Fiscal Year (FY) 2019, as the US reduces its troop strength in Afghanistan and faces continuing pressure from sequester reductions likely to restart in FY16.
“Investment, procurement plus research and development in FY14 will be the lowest value in a decade,” Guy Eastman, senior defence budgets analyst at IHS Aerospace & Defence, said.
However, FY15 investment is projected to be even lower at USD158.4 billion. “We expect a decent increase in investment starting in FY16, yet dependent on a potential sequester becoming reality once again,” Eastman said.
Whether the UK or Russian defence budget is bigger depends upon exchange rate fluctuations of the ruble against the dollar in a given year. “The UK defence budget was cut by two percent in 2014 but, but as the ruble depreciated the UK resumed its position as the world’s third largest defence budget, up from fourth place in 2013,” McGerty said.
The Russian defence budget increased by 17.8 percent in 2014, the fourth consecutive year of double digit growth, to reach RUB2.5 trillion (USD54.4 billion).
Russian defence spending is forecast to reach its peak of RUB3 trillion (USD62.6 billion) 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 spending plans for 2016 and 2017.
The IHS Jane’s Annual Defence Budgets Review is the world’s most comprehensive, forward-looking study of government’s defence budgets.