What happened
Russia has increased military spending 70% over 2023 as the Kremlin continues to mobilize industry to support its efforts in the war in Ukraine.
The proposed US FY25 defense budget is 1% higher than FY24 — although this is effectively a decrease given inflation.9
The EU unveiled its first defense industrial strategy10, China recently announced a planned 7.2% increase in defense spending for this year, and India boosted military spending 4.7% over last year11.
What’s next
War in Ukraine and conflict in the Middle East, as well as geopolitical tensions in Asia, mean that many governments are likely to prioritize increasing military capabilities. Notably, North Atlantic Treaty Organization (NATO) members are forecast to continue expanding defense spending, with 18 of NATO’s 31 members expected to achieve the alliance target of 2% of GDP for their defense budgets, up from 11 in 2023.12
However, industrial base deficiencies, supply chain constraints and labor shortages are likely to hinder efforts to rapidly increase production of basic items such as artillery munitions, particularly in Europe and the US. More advanced, high-demand systems, such as submarines, are equally at risk of extended delays.
Business impact
Aerospace and defense companies are likely to see continuing demand for their products but may face challenges in executing on current programs while building industrial capacity and investing in new capabilities – particularly given government defense spending is lagging inflation in some markets, putting additional pressure on earnings and investment capacity. Executives should explore supply chain improvements to manage potential production volatility, even as pressure increases on smaller suppliers to meet demand.
Aerospace and defense companies may also face talent issues in some markets, as structural gaps in engineering talent and other skilled labor are likely to persist for the foreseeable future.
To varying degrees, governments and militaries in many countries around the world will need to navigate political differences over spending priorities, lower economic growth, and inflation as they seek to replenish stocks and develop next-generation defense systems.
For more information contact Mike Cadenazzi.