Australia—Rising global defence spending drives export opportunities

Global defence spending increased 4% in real terms to a record US$2.24 trillion in 2022, according to the Stockholm International Peace Research Institute (Chart). Geopolitical tensions and security threats—for instance, Russia’s invasion of Ukraine, China’s aggressive posturing, North Korea’s missile program, and Iran’s nuclear capabilities—are likely to incentivise greater defence spending going forward.

Indeed, the US plans to increase military spending by 3.3% to US$886 billion in 2024. Of NATO’s 31 members, the US and only six others met the alliance’s defence spending target of 2% of GDP last year. However, according to NATO Secretary General Jens Stoltenberg “in a more dangerous world… 2% is increasingly seen as a floor, not as a ceiling”. If all members achieved the 2% target in 2022, total outlays would have been around US$90 billion higher. Outside of NATO, India’s latest budget increased defence spending by 13% to US$73 billion in FY2024. Meanwhile, Japan announced last December that the FY2027 defence budget would reach JPY8.9 trillion yen (US$64 billion, or 1.6% of forecast GDP), up 65% on FY2022. This widespread emphasis on defence spending mirrors expected increases in the defence budgets of China and Russia—already estimated to be the world’s second and third largest respectively. This reflects China’s efforts to become a “world-class” military power by 2049 and Russia’s “no limitations” policy on spending for the war in Ukraine. 

National governments will aim for much of the extra spending to remain within their domestic defence industry. However, there will be opportunities for Australian businesses to sell to like-minded foreign governments and participate in joint development projects. Particularly if the US Congress approves President Biden’s proposal to add Australia as a “domestic source” within the Defense Production Act, and progresses AUKUS proposals to enable easier industrial base cooperation, which could step-up US investment in Australia’s defence manufacturing and enable Australian exporters to enter the US market more easily.