Initial Assessment of COVID-19’s Implications On Defense Spending

 In Perspectives

The COVID-19 pandemic has had an unprecedented impact on:

  • Global economies,
  • Health systems,
  • Employment,
  • Government finances and
  • National security

The combination of the pandemic, the quarantine measures needed to contain it, and the sharp drop in oil prices have also put the defense ecosystem under strain in entirely new ways.

Additionally, it seems that the war against COVID-19 will look more like slogging, prolonged trench warfare than a quick blitzkrieg.

At this stage, no one can yet know how dramatic the implications of COVID-19 on defense spending will be in each country, or the depth and duration of the economic downturn.

Methodology on Creating 3 Main Scenarios for COVID-19’s Implications on Defense Spending

It should be clear at this point that the pandemic remains ongoing and the situation is still very fluid, therefore multiple scenarios should be considered to account for various potential outcomes.

Avascent has been following the impacts of COVID-19 and has begun to develop a series of scenarios for how defense spending in key regions such as East Asia, Europe, Middle East, and South America may differ from our current expectations.

In this regard, the below charts are an initial attempt to consider these various potential cases for defense spending reductions in the short-term.

The year 2020 was selected as the basis for these scenarios. The assessments below are based on data from the:

  • European Commission,
  • International Monetary Fund, and
  • World Bank

This data was released in April and May 2020 and will be subject to change based on new developments and the progress in spreading of COVID-19 in the coming months.

Avascent developed three scenarios to analyze COVID-19’s implications for the defense ecosystem. These scenarios are based on both:

  • Macroeconomic factors, such as expected drops in GDP growth and the appreciation of the dollar against local currencies, and
  • The potential for defense budget cuts in the pessimistic scenario

COVID-19’s Implications on Defense Spending Scenarios

Both the optimistic and conservative scenarios show a relatively moderate impact on GDP and defense spending.

In these scenarios, the political and strategic positions of countries remain largely similar, but the degree of damage and strain varies according to the relative impact of the virus.

A more pessimistic scenario could happen with the second wave of COVID-19 which in parallel with flu outbreak may paralyze even the most efficient and well-developed healthcare systems.

Consequently, next to the collapse of healthcare systems, the entire sectors of the economy will be terribly affected by the COVID-19.

The governments themselves will stay under enormous pressure to deal both with the unprecedented humanitarian crisis and the economy under depression.

Consequently, the scale of potential defense spending cuts across fifty-four countries in the four mentioned regions are estimated to range from $59.9 to $149.4 billion depending on the scenario.

This represents a reduction of between 8.9% and 22.3%of Pre-Covid-19 estimates, which assumed that the analyzed countries would spend $669.8 billion on defense in 2020.

In even the most optimistic scenario, COVID-19 seems highly likely to trigger a suspension of the trend in global defense spending growth.

Defense Spending from 2015 to 2019

The presented assessment is part of the series prepared by Avascent Analytics that explores how the COVID-19 pandemic will reshape the global defense market.

Further analyses will be presented as the crisis will continue to evolve.

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