WTW: Defence boom comes with strings attached
In an unstable geopolitical environment, defence contractors face new challenges. A new report from Oxford Analytica and Willis, a WTW business, examines these risks through in‑depth interviews with senior executives across the defence industry.
The report, titled “Managing the new economic risks in the defence sector”, indicates a defence industry with skyrocketing demand but lagging production and insufficient collaboration between countries. The report also includes scenarios for the Ukraine conflict and suggests that defence procurement in Europe will remain robust whether the war in Ukraine persists or a lasting ceasefire is achieved.
The report identifies five economic risks confronting the defence sector today:
• Losing at the scale/sovereignty trade-off, as nations struggle between pooling defence resources for efficiency and preserving national control
• Tariff wars, with escalating trade barriers disrupting supply chains and raising costs
• China dependence, given the sector’s reliance on Chinese materials and components such as rare earths and electronics
• Phantom spending, where political pledges to increase defence budgets may not translate into actual future investment
• Failure to reindustrialise, as Western nations rediscover the need for industrial capacity but face difficulties rebuilding it
Beyond these current concerns, interviewees flagged two emerging threats tied to fiscal pressures: social backlash against defence spending and looming fiscal crises. With debt‑to‑GDP ratios exceeding 100% across much of Europe, North America, and Japan, governments risk “soft defaults” through inflation or financial repression. Rising defence budgets could create political grievance if they lead to higher taxes or cuts in social programmes, especially amid uncertain economic growth. These pressures may undermine long‑term defence commitments and create political instability.
Sam Wilkin, director of political risk analytics at Willis, said: “In the late 1990s and early 2000s, terrorist threats dominated the national security agenda. In retrospect, that concern was born in an era of extraordinary geopolitical stability, when conflicts involving states had dwindled to historic lows.
“Today, that stability has vanished. Non‑state actors remain disruptive, but the last few years have been shaped by the return of state‑sponsored violence. These threats occur on a much larger scale and therefore have driven a surge in defence procurement and a reshaping of global defence supply chains. For companies active in the sector, this shift in the risk landscape has strong implications for operations and future planning.”
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