Standard Life Investments

Weekly Economic Briefing

Global Overview

Who has the bigger button?

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While rising geopolitical risks can create headaches for investors, mounting geopolitical challenges present a silver lining to the defence industry and military planners asking for larger budgets. The post-Cold War era has largely been defined by leaner defence budgets and a focus on fighting smaller, asymmetric wars. This increased focus on counter-terrorism led to shifting defence budgets that downplayed the risk of great power conflicts. However, a shift is emerging; following Russian actions in Crimea, Chinese expansion in the South China Sea, and a growing acknowledgement in Washington that the largest global challenge now stems from “revisionist powers”, global defence spending is set to rise to post-Cold War highs. According to the annual forecast produced by IHS Jane’s, worldwide defence spending this year could be approximately US$1.67 trillion, exceeding the previous post-Cold War record set in 2010. The amount would be a 3.3% increase over 2017, representing the highest year-on-year growth in over a decade. The biggest driver of the increase comes from the US. The recently approved military budget is hailed by the administration as the largest in US history, representing a 4.8% increase over last year.

However, the rise in headline spending presents only part of the picture, demonstrating how defence spending is as much an economic issue as one driven by security policy. The increase in defence spending largely reflects improving economic conditions, highlighted by the fact that as a percent of GDP, global defence spending is actually forecast to be the lowest at any point over the past decade. While the broader increase in spending is primarily a factor of economics, within regions there is a clear difference in spending based on perceived instability (see Chart). Perhaps unsurprisingly, spending in Eastern Europe and Baltic states is set to increase substantially in 2018, with eight NATO countries (not including the US) meeting the alliance guidelines calling for members to spend 2% of their GDPs on defence. Spending is set to grow in Asia as well. Economic growth will continue to be a factor in overall military spending but, with many risks on the horizon, it’s no surprise spending is on the rise.

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