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Asia-Pacific and the Middle East & Africa Drive Growth in Defense Spending
Defense spending continues to grow in 2011, with developed countries preparing to or already cutting their spending, and developing nations building their military capacity to match their economic power. Regional instability and changing security threats are the main reason for this growth.
The global market expanded by 2.7% in 2011, to reach a value of $1.5 trillion, indicating a compound annual growth rate (CAGR) of 6.1% in the period 2007-2011. Personnel numbers declined with a compound annual rate of change (CARC) of- 1.6%, reaching a total of 12.5 million personnel.
Growth in this period was primarily driven by Asia-Pacific and the Middle East & Africa, which achieved the highest CAGR rates. The United States alone accounts for 45.8% of global defense spending, with the Americas and Europe remaining the absolute largest. Asia-Pacific contains India and China which wish to further assert their economic power. Another significant region of growth was Russia, which seeks to transform its military following years of neglect. Western Europe experienced static growth in 2011 as various governments come under pressure in the face of continued economic downturn.
Defense spending is primarily driven by security concerns. In some countries, modernization was an urgent need, whereas in others, new strategies were adapted to adhere to changes in perceived threats. Regional instability remains an issue for several countries. Certain projects have been called into doubt or put off in favor of more cost-effective projects. The F-35 program has been called into question due to escalating costs, and India chose the Dassault Aviation Rafale fighter due to its comparative cheapness to the EADS Eurofighter.
Defense spending sees two parallel trends. In many developed countries, defense spending is being reconsidered as the global slowdown continues, with Western Europe the most culpable in this strategy. The Eurozone debt crisis and the continental austerity drive have seen defense spending suffer, with large spenders, such as the UK and France, preparing to cut their budgets. Changes of perceived threats also encourage this, with sheer strength being sidelined in favor of rapid deployment, mobility and interoperability. This is also reflected in the personnel numbers, as many nations consider reducing troop numbers Multilateral defense networks, such as NATO, are becoming more appealing prospects as countries strive to achieve defense efficiencies.
Even the United States is implementing cuts. Some of the leading companies within the market are heavily reliant on US spending; both the Department of Defense, and US Foreign Military Aid, which finances many other countries such as Israel and Egypt. Countries are attempting to circumvent this by turning from traditional markets in the US and Europe and seek other customers.
The converse trend is the expansion of the budgets in several developing nations, with Russia, India and China some of the notable increases. Many countries have neglected their militaries, with current equipment reaching near obsolescence. Others, such as China, wish to bring their defense spending in line with their economic capabilities. Countries within the Middle East and South Korea are both increasing spending due to regional instability. Modernization of militaries will also lead to a reduction in personnel volumes.
The Americas were the largest segment in 2011, accounting for 50.7% of revenues. Europe was the second largest, accounting for 24.9% of revenues in 2011. The United States proved the largest in terms of value with spend totaling $705.6 billion in 2011. China is the largest market in terms of volume, with 2.2 million personnel in 2011.
Segmentation varies depending on the region. Globally, personnel expenditure is the most dominant, accounting for 43.8% of the sales. Other expenditure accounted for 25.1%, and Equipment 25.1%. Infrastructure expenditure accounts for approximately 3.4%, and remains marginal throughout individual markets.
Global defense spending is forecast for growth to decelerate, reaching over $1.69 trillion by 2016 with a CAGR of 1.9%. Europe is expected to grow at a CAGR of 1.7%, the Americas will decline with a CARC of 2.4% and Asia-Pacific will grow at 10.5%. The Americas will remain the largest regional market, with a value of over $692 billion. Asia-Pacific will overtake Europe to become the second largest markets, valued at $464.7 billion.