Global defence-spending on the up, despite economic crunch

Notwithstanding the coronavirus pandemic and subsequent 3.5% contraction in global economic output in 2020, global defence-spending was resilient with real growth matching the higher rate achieved in 2019. However, even with a potential uplift in European

spending, this increase could slow in 2021 as the defence budget of the United States flattens and growth in Asia-Pacific slows.

By Fenella McGerty*

Global defence spending reached US$1.83 trillion in 2020, a 3.9% annual uplift in real terms. As a proportion of GDP, global spending sharply increased from an average of 1.85% in 2019 to 2.08% in 2020 as military budgets were maintained, despite severe economic contractions caused by the coronavirus pandemic and the series of lockdowns introduced around the world in response. Global defence spending growth has strengthened since 2018 but could slow in 2021, as the US defence budget is set to flatten and Asia–Pacific spending growth is expected to slow. The increase in the US and Chinese defence budgets accounted for almost two-thirds of the total increase in global spending in 2020: the US defence budget increased by 6.3% in 2020 in real terms, while China’s growth slowed slightly to 5.2% in 2020 from 5.9% in 2019.

Immediate adjustments in Asia, but growth continues

Beyond China, wider regional spending growth also slowed in 2020 as countries including Thailand, South Korea and Indonesia made immediate downward adjustments to their defence budgets in order to fund emergency relief efforts in response to the pandemic. In most cases, planned growth was reduced rather than actual reductions made to the previous year’s allocations. The slowdown in both China and the wider region means that defence expenditure growth in Asia slowed to 4.3% in 2020, down from 4.6% in 2019. Despite this, the region’s share of total global defence spending reached 25.0% in 2020, compared to 17.8% in 2010 and 23.2% in 2015. This will likely increase in 2021, if only modestly, despite increased expenditure in Europe. This is because the approved FY21 US defence budget is nominally flat against FY20 levels, while China’s budget is expected to continue to grow, albeit at a slower pace, as its economy did not suffer the contractions seen in advanced markets. In the long-term, the region’s relatively effective handling of the pandemic places it on a stronger economic footing globally, enabling continued increases in defence spending.

Middle East defence spending still stalls

In line with the poor performance of oil prices, defence spending in the Middle East and North Africa contracted for the third consecutive year in 2020, falling to US$150 billion (excluding security expenditure) and its share of global defence spending fell to 8.9%, from a peak of 10.5% in 2017. This is despite the region allocating by far the greatest proportion of economic output to defence, at 5.2% of GDP compared to the global average of 2.08%. Other oil-dependent economies also began to show signs of strain. Russia, after managing a sizeable 3.8% real increase in the core ‘national defence’ budget for 2020, was only able to implement a negligible 1.4% increase for 2021, which translates to a 3.6% cut in real terms. Total Russian military expenditure (including pensions, military housing and health and social support) is set to fall from over 4.1% of GDP in 2020 to under 3.8% of GDP by 2023.

Europe defence spending increases continue despite financial pressure
Total European defence spending grew by 2.0% in real terms in 2020. This was more modest than the 4.1% uplift seen in 2019 and Europe’s share of global defence spending fell slightly in 2020 from 17.8% in 2019 to 17.5%. However, average spending among European NATO members has steadily increased as a proportion of GDP over the last six years, from 1.25% of GDP in 2014 to 1.52% in 2019 and jumping to 1.64% of GDP in 2020. This is still well below the NATO recommendation that its members aim to spend 2% of GDP on defence, despite the significant 7.0% average economic contraction expected in 2020. When it comes to spending on defence equipment, NATO’s European members maintained the higher investment share of defence spending that they achieved in 2019, allocating 23% on average in 2020, beyond the NATO-recommended level of 20%.

Furthermore, the commitment by major European defence markets – France, Germany, Italy and the United Kingdom – to continue to increase defence budgets in 2021 and beyond signals an intention to avoid the drastic cuts that were implemented in the wake of the 2007–08 financial crisis. The UK announced in November 2020 that £16.5bn (US$21.1bn) would be added to the defence settlement over the 2021–25 period. Meanwhile, France and Germany continued with existing military financial plans for 2021 after enacting sizeable investment programmes in 2020 in order to support domestic defence industries. If these spending plans continue on their current trajectory, in 2021 Europe could be the region with the fastest growth in global defence spending. Whether this commitment continues beyond 2021 will depend on the ultimate economic cost of the pandemic and the inevitable fiscal measures that governments will need to enact once the crisis has abated – itself dependent on effective crisis management and a successful vaccine rollout programme across the region.

The stronger short-term growth in European defence spending will not offset the slowdown in Asian defence spending growth and a flattening US defence budget. As such, the momentum in defence budget growth will likely slow in 2021. As the pandemic evolves and governments react to fiscal pressures caused by the extensive economic assistance programmes, enacted in 2020 and continuing into 2021, defence budgets may begin to contract from 2022–23.

*Fenella McGerty is responsible for the Institute’s defence economics research and data presented in The Military Balance, the Military Balance+ online database and other relevant IISS publications.

Source: iiss.org

The post Global defence-spending on the up, despite economic crunch appeared first on ARMYNOW.NET.