Aerospace and defense spending: What will be the next normal?

McKinsey 07 May 2020 12:00

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The rapid onset of the coronavirus has had starkly different effects on industries. In commercial aerospace, suppliers saw profits fall precipitously as flights were grounded, production rates dropped, and whole factories idled. In contrast, defense markets and manufacturers appear to be largely unscathed, although they have weathered some disruptions. But this may soon change. Defense spending is driven by annual budget cycles rather than daily load factor, so changes can take longer to manifest. As we enter a new fiscal year, defense manufacturers could face big headwinds.

The shift may not occur immediately, however. Broadly speaking, two factors have historically had the most influence on defense spending: threats and affordability. Both will come into play in the aftermath of the coronavirus pandemic as governments calibrate the relative importance of the threats they face against their new economic realities. In keeping with past patterns, countries may give most weight to threats, real or perceived, over the near term. If there are anticipated or ongoing conflicts, their defense budgets will probably increase. Over the longer term, however, economic factors tend to prevail, and governments may set defense budgets in line with their diminished resources.

COVID-19 is a human tragedy, above all, and the continued spread of the coronavirus remains a principal source of global uncertainty. But as my colleagues have argued, we must solve for both the coronavirus and the economy; the dual imperative of our time is the desire to preserve lives and livelihoods. Both will require substantial resources for public health and for economic rejuvenation. Many countries are reallocating substantial sums to disaster assistance and health measures to preserve lives. Although this shift is essential during the pandemic, it will likely put enormous pressure on the public purse and could force cuts in other areas.

The post-9/11 era might be giving way to a postpandemic paradigm. Whether this next normal will permanently alter the world order is still uncertain, but it is likely to have drastic implications on how leaders think about national security and foreign policy. One thing seems quite clear: absent an escalation or emerging tensions in great-power competition, we can expect downward pressure on defense budgets around the world.

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South KoreaGerman Council on Foreign RelationsBarry R PosenThe post
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