AerospaceSociety reviewed the global aerospace and defense industry in Western and Emerging Markets. Our analysis identified flattening growth in Western spending, challenged by increasing geopolitical challenges and higher input costs, offset by sustained growth in developing countries perpetuated by complex military tensions in Middle-East and Asia.
Western Demand Growth Challenges
Many western countries were forced to cut military spending, promoted by the winding down of large-scale combat operations in the Middle East, and budget pressures following softer global economic recovery post the economic crisis.
Between 2012 and 2018, the defense budgets of the United Kingdom, France, Germany, Italy and Spain (the five largest European defense spenders) declined an over 6% . In the United States (accounting for one-third of industry revenue), the combination of fewer large combat operations in the Middle East (i.e. the end of the Iraq War and reduced activities on the Afghan front) translated to lower federal funding for defense at an annualized rate of 3% . Consequently, purchases of industry products declined, with procurement and development programs reduced, delayed or even canceled.
While the ongoing tensions with Russia and some increased conflict in the Middle-East is expected to create healthier demand for military aerospace products, the high debt-levels and slow GDP growth in Europe will mean most member states will continue to struggle with funding defense procurement, translating to increased collaboration to spread costs, and further M&A activities to generate non-organic growth . In the US, federal funding is expected to also remain stagnant, where the limited resources will mean that industry programs will increasingly compete with one another, further endangering multiple industry projects all while promoting consolidation of R&D efforts .
Sustained Global Growth To Meet Geopolitical Tensions
Surging geopolitical tensions and conflict in the Middle East and Asia have led to increased spending on industry products to modernize own armed forces and gain advantage over rivals. Increased defense spending non-Western countries also helped many Western companies offset reduced domestic spending. In particular, oil-rich countries in the Middle East that lack a large domestic aerospace industry have proved to be prime importers of industry products.
Over the five years to 2018, non-NATO defense spending grew at an annualized rate of 2% . Sustained economic growth in emerging markets allowed many countries to increase spending on defense, including procurement of aircraft, missiles and spacecraft. In particular, large nations, such as Russia and China (second- and fourth-largest defense spenders, respectively), significantly increased the spending and acquisition of military industry products.
Ultimately, this growth in non-Western market will eventually mean that Export sales will become particularly important for Western defense contractors, as they seek potential markets to offset domestic defense spending pressure.
Over the five years to 2022, industry revenue is forecast to climb at an annualized rate of 3.9% to $309.0 billion . Defense spending in the United States and Western Europe is anticipated to remain under economic pressure, but become far more stable than over the past five years . In particular, demand for certain types of aircraft, such as the F-35 stealth fighter, are projected to grow. Nonetheless, demand for industry products from non-Western nations will continue to account for majority of growth component.
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 Deloitte 2017 Global aerospace and defense industry outlook
 IBISWorld Industry Report, 2017 Global Military Aircraft & Aerospace Manufacturing
 US Bureau of Public Debt
 The World Bank GDP Data 2018