LONDON: With global defence expenditure is set to increase again in 2018 to its highest level since the end of the Cold War, Pakistan’s defence spending to reach $11.1billion in 2017, according to the annual Jane’s Defence Budgets Report released by IHS Markit (Nasdaq: INFO), a world leader in critical information, analytics and solutions.
According to the Jane’s report, defence spending will grow for the fifth consecutive year, reaching $1.67 trillion in 2018 and overtaking the previous post-Cold War record of $1.63 trillion seen in 2010.
Defence spending will increase by 3.3 percent in 2018 – the fastest rate of growth for a decade – driven by the largest year-on-year increase in US spending since 2008. Funding for the procurement of military equipment is also expected to rise from $295 billion in 2017 to $315 billion in 2018, another record high in global terms.
“The increase in defence spending reflects improving economic conditions around the world, coupled with a response to continuing instability in a number of key regions,” said Fenella McGerty, principal analyst, Jane’s by IHS Markit. “However, defence spending remains lower in relation to GDP than at any time in the last 10 years, which suggests that recent growth primarily relates to improved economic and fiscal conditions in established markets.”
Over the last decade, global defence expenditure has fallen from an average level of 2.7 percent of GDP to 2.2 percent.
The key reason for the expected acceleration in global defence spending growth is the potential 4.7 percent increase to the US budget planned for 2018.
With the US Department of Defense’s (DoD) budget accounting for 40 percent of all global defence expenditure, changes in US spending affect trends worldwide. Since the 11 September attacks in 2001, the US has spent around $10 trillion on defence.
“President Trump and his administration sought large increases in the DoD budget in his first budget. The increased funding will go toward fixing readiness and training issues that are largely the result of sequestration cuts,” said Guy Eastman, senior analyst, Jane’s by IHS Markit. “Investment will also increase in targeted areas such as Ballistic Missile Defence (BMD), shipbuilding, missiles and munitions, space-based systems, and C4ISR systems.”
Nine NATO members will reach the 2 percent of GDP benchmark for defence expenditure in 2018 – the highest number hitting this goal since the financial crisis. These countries are the US, Greece, Estonia, Turkey, Latvia, the UK, Lithuania, Poland, and Romania.
Western Europe is still emerging from a tough six-year period where defence spending was cut by 1 percent annually between 2009 and 2015. The trend has steadily reversed since then and regional defence spending is expected to increase by 1.3 percent in 2018.
“Defence spending growth in Western Europe will largely be driven stabilising government balance sheets, the perceived threat from Russia on NATO’s eastern border, and several key procurement programmes coming online.” McGerty said. “However, this growth will hinge on political developments in the region. Not least, the outcome of German coalition discussions and the bearing this will have on European defence cooperation as well the progress of Brexit negotiations and the resulting impact on the economic outlook of the UK and its trading partners.”
Eastern Europe will be the fastest growing region in the world in 2018 as several countries pursue the goal to increase defence spending to 2 percent of GDP. Growth has been particularly spectacular among the three Baltic States. By next year, Baltic defence spending will have more than doubled in real terms compared to 2014 levels and Estonia, Latvia and Lithuania will all be spending 2 percent of GDP or more on defence.
“Growth has taken off in Eastern Europe since Russia’s intervention in Ukraine in 2014 with the majority of the new defence funding being put towards military modernisation,” McGerty said. “Armoured vehicle procurement is on the increase – in fact, Europe is emerging as the leading spender globally in the military ground vehicle market.”
Russian defence expenditure fell for a second consecutive year in 2017 as Moscow continued to grapple with challenging economic and fiscal conditions.
“The defence budget is now around 10 percent lower than its 2015 peak and is expected to be reduced by a further 5 percent next year. Russian military modernisation will continue but the cuts are impacting the pace of that process,” said Craig Caffrey, principal analyst, Jane’s by IHS Markit.
Growth in Asia-Pacific – a region that has experienced robust growth over the last decade – slowed this year to its lowest rate since 2010 due to smaller increases in China and India and cuts to spending in South East Asia.
“While we saw a distinct slowdown in 2017, the foundations remain in place for robust increases to return over the next two years. We still expect Asia-Pacific to be behind the driving force behind long term growth in global defence spending,” Caffrey said.
“Economic growth is still the main factor behind rising spending in Asia-Pacific but we’re starting to see strategic factors play a more prominent role. In recent years Chinese actions in the East and South China Sea, the North Korean ballistic missile threat and insurgencies throughout South East Asia have all caused additional funding to be diverted towards defence,” Caffrey said.
Following a reduction in 2016, defence spending returned to growth in the Middle East and North Africa this year. Crucially, Saudi Arabia – the largest defence spender in the region – increased its defence budget in 2017 after cutting spending the previous year.
“Fiscal consolidation is still occurring in a number of key states in the region following the collapse in oil prices; however the challenging security environment has seen defence budgets protected from cuts in most cases. We expect defence budgets to continue to increase going forward but growth will be constrained by a more cautious approach to government spending,” Caffrey said.