Global defense spending to reach levels not seen since end of Cold War, says report

Key Points
  • Worldwide defense spending is forecast to rise 3.3 percent in 2018 from this year, or the fastest growth rate in a decade, says IHS Jane's in new report.
  • It said the jump in global defense spending is due in large part to a potential 4.7 percent rise in the U.S. military spending next year.
  • The region with the fastest-growing defense spending is Eastern Europe, reflecting Baltic states' worries about Russia's military activities.
  • Russia's annual military spending remains below its 2015 peak and is forecast to drop 8 percent in 2018 while China's jumps about 6 percent.
Soldiers serving in the NATO enhanced Forward Presence (eFP) battalion battle group ride a tank as they take part in an exercise in Rukla, Lithuania, on August 11, 2017.
Petras Malukas | AFP | Getty Images

Global defense spending is forecast to reach $1.67 trillion in 2018, the highest level since the end of Cold War, according to a defense study released Monday.

IHS Markit's Jane's Defence Budgets Report forecasts annual global defense spending would represent a 3.3 percent increase over 2017, or the fastest growth rate in a decade.

The region with the fastest growing defense spending is Eastern Europe, where the three Baltic states — Estonia, Latvia and Lithuania — that were once part of the Soviet Union are seen as trying to counter Moscow's stepped-up military assertiveness following Russia's annexation of Crimea from Ukraine in 2014. Indeed, Baltic defense spending by next year "will have more than doubled in real terms compared to 2014 levels," the report said.

"Growth has taken off in Eastern Europe since Russia's intervention in Ukraine in 2014 with the majority of the new defence funding being put towards military modernization," wrote Fenella McGerty, principal analyst at IHS Jane's. "Armored vehicle procurement is on the increase — in fact, Europe is emerging as the leading spender globally in the military ground vehicle market."

NATO has a target for members to spend 2 percent of GDP on defense but only five of the 28 member countries this year met the alliance goal. But the report forecasts nine NATO members will reach the 2 percent target in 2018. It said these countries are Estonia, Latvia, Lithuania, the U.S., the U.K., Turkey, Poland, Romania and Greece.

Overall, the report estimates that defense budgets worldwide in the past decade have fallen from an average level of 2.7 percent of a country's gross domestic product to 2.2 percent.

In Western Europe, the report said the region "is still emerging from a tough six-year period where defense spending trended lower between 2009 and 2015." It said the region has bounced back since that time and is forecast to post a 1.3 percent increase in defense spending next year.

"Defense spending growth in Western Europe will largely be driven [by] stabilizing government balance sheets, the perceived threat from Russia on NATO's eastern border, and several key procurement programs coming online." McGerty said.

According to the report, the growth in global defense spending next year is expected to be fueled in large part by a potential 4.7 percent rise to the U.S. Department of Defense's budget planned in fiscal 2018. Also, IHS Jane's said U.S. defense spending — about 40 percent of all global defense expenditures — is poised to show its largest year-over-year growth since 2008.

"President Trump and his administration sought large increases in the DoD budget in his first budget," said Guy Eastman, senior analyst at IHS Jane's. "The increased funding will go toward fixing readiness and training issues that are largely the result of sequestration cuts."

Last week, President Donald Trump signed the National Defense Authorization Act, which authorizes nearly $700 billion for national defense spending in fiscal 2018.

The analyst said the U.S. also is devoting more military spending to such things as ballistic missile defense, shipbuilding and space-based systems, among other things.

Since the 9/11 terrorist attacks, the U.S. has spent about $10 trillion on defense, according to the report.

Meantime, IHS Jane's said Russian defense expenditures are forecast to decline in 2017 for a second consecutive year, reflecting fiscal woes. Low oil prices have hurt Moscow's income and caused it to slash the budget and dip into reserves.

The researcher said Russia's defense budget now stands about 10 percent below its 2015 peak, and it forecasts Moscow will spend about $43.1 billion on defense next year, or down 8 percent from $47 billion in 2017.

Figures from the report show Russia's defense spending this year ranked it in the sixth slot worldwide, down from No. 4 in 2016. In 2017, Saudi Arabia, the U.K., India, China and the U.S. all had higher annual defense spending than Russia.

"Russian military modernization will continue but the cuts are impacting the pace of that process," said Craig Caffrey, principal analyst at IHS Jane's.

In the Asia-Pacific region, military spending showed a slowdown in 2017, although Caffrey looks for it "to return to growth over the next two years. We still expect Asia-Pacific to be behind the driving force behind long term growth in global defense spending."

Caffrey added: "Economic growth is still the main factor behind rising spending in Asia-Pacific but we're starting to see strategic factors play a more prominent role. In recent years Chinese actions in the East and South China Sea, the North Korean ballistic missile threat and insurgencies throughout South East Asia have all caused additional funding to be diverted towards defense."

China's military spending in 2018 is forecast to reach $203.3 billion, up nearly 6 percent from $192.5 billion this year, according to the researcher. China has been increasing its development of warships, stealth combat aircraft, advanced missiles and other weapon systems in recent years.

A report Monday in the South China Morning Post said "increased military drills suggest mainland China is preparing to strike against Taiwan." It cited experts who found drills, including "recent 'island encirclement' patrols" as something bold and "very unusual" compared with past activities that were considered "mostly symbolic."