NATO Members Drive Fastest Increase in Global Defence Spending for a Decade, Jane’s by IHS Markit Reveals

December 18, 2018 – Global defence expenditure grew by 4.9 percent in 2018, the fastest growth rate since 2008, according to the annual Jane’s Defence Budget report, released today by business information provider IHS Markit.

Global defence spending grew for the fifth consecutive year to reach a total of USD1.78 trillion in 2018, significantly exceeding the post-Cold War record of USD1.69 trillion in 2010, according to the report.

Fueling this global growth was a 5.8 percent boost to NATO spending, which totaled USD54 billion, largely due to higher defence spending in the US. Jane’s by IHS Markit forecasts that overall NATO defence expenditure will exceed USD1 trillion in 2019.

“Following a challenging period for NATO members in the wake of the global financial crisis, countries have begun to increase defence spending again, in response to emerging threats,” said Fenella McGerty, principal analyst, Jane’s by IHS Markit. “This has slowed the rebalance in defence expenditure toward emerging markets.”

Jane’s by IHS Markit projects that global defence spending growth will moderate to a level of around 2 percent per year over the next five years as budget increases in Europe and North America slow and emerging markets again become the key source of growth.

“In 2018, we’ve seen a reversal of recent trends with Western states driving growth,” said Craig Caffrey, principal analyst at Jane’s by IHS Markit. “Going forward we still see Asia and the Middle East as the key sources of sustainable increases in defence spending.”

NATO members increase spending

In 2010, NATO member spending accounted for two thirds of global defence expenditure. As emerging markets expanded and developed economies implemented cuts over the decade, the balance of global defence expenditure shifted dramatically. The NATO share of expenditure steadily declined to just 55 percent in 2017 with non-NATO spending on track to surpass NATO expenditure by the early-2020s.

“As 24 of the 29 NATO members increased their defence budget in 2018, the decline in the NATO share of global spending has stalled,” McGerty said. “The recommitment to defence in Western states means the global balance of expenditure between NATO and non-NATO markets is now more likely to shift from the mid-2020s.”

Nine NATO members will reach the 2 percent of GDP benchmark for defence expenditure in 2019 – compared to just four members in 2014. These countries are the US, Greece, Estonia, Lithuania, United Kingdom, Poland, France, Latvia and Romania.

US continues to invest in modernisation

US defence spending increased by USD46 billion in 2018 to reach USD702.5 billion as the Pentagon sought to improve military readiness and bolster missile defence capabilities. The 7 percent boost to the Pentagon’s budget represents the largest increase in US defence spending since 2008.

“Modernisation accounts will reach USD244.1 billion in FY19 – the highest level of investment funding since the period FY07-10, which experienced the maximum Overseas Contingency Operations and maximum US Department of Defense (US DoD) spending levels,” said Guy Eastman, senior analyst at Jane’s. “The funding levels for FY18 and FY19 have enabled the US DoD to start on the road to improved readiness and acquire improved warfighting capabilities.”

Eastern European budgets continue to expand, while Germany’s 11 percent spending boost will bolster Western Europe’s total

Six of the ten fastest growing defence budgets in the world in 2018 were situated in Eastern Europe. Defence spending in the region grew by almost 9 percent in 2018 with Poland, Romania and the Ukraine driving increases. Notably, spending on military equipment has more than doubled in the region since the annexation of Crimea in 2014.

Western European defence spending increased for the third consecutive year in 2018 to reach USD248 billion – 2.4 percent higher than 2017. In 2019, regional spending should exceed pre-financial crisis levels as growth accelerates to 3.6 percent driven by a major 11 percent increase in the German defence budget.

“As fiscal balances have improved, countries are able to respond to a markedly poorer security environment and address the capability gaps that have emerged,” McGerty said. “European defence cooperation is also a driving factor as countries look to bolster domestic capabilities but also partner on new technologies, all of which requires greater investment.”

While the outlook for defence spending growth in Europe appears on an upward trend, this hinges on a stable UK defence budget and therefore upon the outcome of Brexit negotiations and the impact on the UK economy.

Strong economic conditions in Asia-Pacific drive accelerated growth

Growth in Asia-Pacific accelerated to 3.6 percent in 2018 but remains below the average 4.8 percent rate seen over the past decade. Total regional spending reached a record high of USD465 billion in 2018.

Despite security concerns, economic growth continues to be the primary driver of defence budget growth in Asia.

“Strategic drivers are undoubtedly becoming more important, but trends continue to be dictated by economic and fiscal conditions. Strong underlying economic fundamentals mean that Asia is where we expect the majority of the sustainable long-term growth will come from,” Caffrey said. “From a budgetary perspective, we’re still seeing very few indicators that an arms race is underway in Asia.”

Saudi surpasses France as fifth largest defence spender

Higher oil prices over the course of 2018 contributed to an uptick in growth in the Middle East and North Africa with total spending in the region reaching USD180 billion. Saudi Arabia increased its defence outlay by 7 percent to hit USD56 billion, making the Kingdom the fifth largest spender on defence globally.

“The large increase in Saudi Arabia’s defence budget drove trends in MENA,” Caffrey said. “With oil prices falling again in the latter part of the year, regional growth is likely to remain relatively conservative in the short term.”

Brazil dominates defence spending in Latin America

Latin America’s defence spending grew by 10.4 percent in 2018, reaching a new high of almost USD62 billion. Brazil’s allocation of USD29.9 billion accounted for 48.3 percent of this total.

“The recovery in Latin American defence budgets continued this year, but aside from Venezuela, where hyperinflation necessitated massive spending supplements, growth was markedly slower than in 2017,” said Andrew MacDonald, senior analyst at Jane’s by IHS Markit.

Top 20 defence budgets – 2017 and 2018 (USD billion)

Position Country 2017* Position Country 2018*
1 USA 656.7 1 USA 702.5
2 China 191.2 2 China 207.6
3 India 61.2 3 India 62.1
4 UK 57.0 4 UK 58.4
5 France 52.5 5 Saudi Arabia 56.0
6 Saudi Arabia 52.1 6 France 53.6
7 Russia 50.9 7 Russia 51.6
8 Japan 48.3 8 Japan 45.1
9 Germany 43.5 9 Germany 44.5
10 South Korea 38.0 10 South Korea 39.1
11 Australia 32.1 11 Australia 32.0
12 Brazil 28.9 12 Brazil 29.9
13 Italy 26.7 13 Italy 27.2
14 UAE 19.3 14 UAE 21.4
15 Canada 16.5 15 Iran 17.4
16 Israel 16.4 16 Canada 16.1
17 Iran 16.2 17 Israel 16.0
18 Taiwan 14.6 18 Spain 15.3
19 Spain 14.4 19 Taiwan 14.5
20 Pakistan 12.0 20 Turkey 13.0

*Figures in constant 2018 USD billions. The intelligence
cutoff for this report is 13 December 2018.