Global defense industry set for bleak 2015

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The year ahead looks bleak for the global defense industry as governments in major markets cut back on spending, new analysis shows.

"With further cuts required to government spending in the West and declining oil revenues dampening growth in the Middle East, defense expenditure may contract in 2015," consulting firm IHS Jane's said in a recent note.

The group estimates global military spending at $1.6 trillion in 2015, down nearly 6 percent from $1.7 trillion in 2013 - the latest reading - as per Stockholm International Peace Research Institute (SIPRI) calculations.

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Key source of decline

Six nations generated 60 percent of global spending in 2013, with the United States alone accounting for 35 percent, data from Deloitte showed. But U.S. spending has been declining since automatic spending caps were enacted in 2011, thus it's no surprise that IHS sees the country contributing the lion's share of declines next year.

"The impact of sequestration and declining Overseas Contingency Operations (OCO) funding drives the negative trend in the U.S. as well as creating short term uncertainty," IHS said, referring to the limits on government spending and terrorism-related military campaigns.

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The gloom in the U.S. is even expected to offset impressive growth in the world's second-largest spender, China. Earlier this year, Beijing increased its 2014 military budget by $132 billion, a 12.2 percent annual increase from 2013.

A look at the situation in Russia, the United Kingdom, and France, among the top seven biggest spenders in the world, also doesn't bode well for global trends.

Moscow is expected to increase military spending by 30 percent next year, but as the country faces a recession and a currency crisis, the finance minister reportedly warned a review of those figures was needed.

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"The current U.K. defense program assumes real zero growth for the defense budget between 2015 and 2020," Deloitte said. Meanwhile, French spending is set to decline by more than seven percent by 2019.

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Growth markets turn cautious

The Middle East has greatly contributed to the defense sector, with spending growth averaging an annual rate of almost 9 percent in real terms over the past three years, IHS said. However, the recent tumble in oil prices, a major source of income for most economies in the region, has changed the near-term outlook.

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"While a number of key defense spenders in the region such as Saudi Arabia and the United Arab Emirates are unlikely to cut spending substantially, regional spending is expected to be flat in 2015 as fiscal consolidation becomes a consideration in many countries," IHS added.

In order to balance their budgets, Saudi Arabia needs an oil price of $90 per barrel, while Qatar requires $77, and the U.A.E $73, according to United Nations data. Those prices are well below Brent crude's current level of $59.

On the bright side…

Geopolitical events could boost to defense spending in light of the reverberating consequences of the Ukrainian conflict and the Islamic State's (IS) offensive, IHS said.

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"Events in Ukraine have already shown signs of reversing recent negative defense budget trends in some Eastern European countries and have also impacted Russian spending plans. Meanwhile the open-ended timetable for the campaign against IS will arrest declining operational spending in the West and create an impetus behind security concerns in the Middle East."

Another bright spot is the Asia-Pacific region, where defense expenditure is expected to accelerate from 3.3 percent in 2014 to 4.8 percent next year thanks to the generally better performance of Asian economies and the tailwinds of cheap oil.