Suddenly, Global Defense Spending Booms

By Simon Constable

Constable, a former TV anchor at The Wall Street Journal, is a fellow at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

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It was 1962, and tensions were rising as the Soviet Union began a buildup of nuclear missiles in Cuba, just 90 miles south of the United States. Worries of a nuclear Armageddon were palpable. Fortunately, the crisis was averted—and so was the military buildup. Over the next six decades, in a remarkable string of declines, global defense spending (including military equipment, war matériel, personnel, and weaponry) would fall from 6.3 percent of global GDP in 1962 to a low of 2.1 percent in 2018, helped in part by the end of the Cold War and the collapse of the Soviet Union.

But that was then. In a turnabout whose magnitude may surprise you, global defense spending rose a whopping 6.8 percent in 2023 from the previous year to a staggering $2.4 trillion, the largest annual increase since 2009, according to the Stockholm International Peace Research Institute. And that’s a conservative number that underestimates the true size of defense budgets in some countries, such as the US and China, says Marc Chandler, chief market strategist at currency company Bannockburn Global Forex. Clearly, there’s been a decline in global peace and security, and many government departments outside of defense are still heavily involved in military activity. “It’s a big arms race,” he says.

The obvious wake-up call for increased military funding was Russia’s 2022 invasion of Ukraine. But there have been others. Number one is global geopolitical fragmentation, Chandler says. Capitalism tends to work best when one country is in charge, he observes, as the US was after World War II, when it took the global lead. But now the country’s hegemony has begun to fray. “The US no longer has the ability or the willingness to fill that role,” he says.

Of course, this increased spending is affecting the economy in multiple ways. Countries that have been supplying weapons to allies like Ukraine now need to replenish their own stockpiles. Of course, that will mean more jobs and economic growth. But it also could result in higher inflation, depending on how much money the government borrows. More borrowing raises the risk of more inflation. That’s less of a challenge for the US, because as the leader of the global monetary system it has ample capacity to borrow, at least for the time being.

Europe, on the other hand, has less borrowing capacity. The European Union has already sent out warnings to some member countries, including France and Italy, to reduce their budget deficits. “Some countries may not be able to have an overnight burst in defense spending,” says Peter Earle, a senior research fellow at the American Institute for Economic Research.

Cash-strapped governments may face what economists call the “guns versus butter” dilemma: If they want to spend more on defense, then they may need to cut spending on other things—the so-called “butter”—which would likely mean reductions in social programs like education, welfare, and direct subsidies. “Many nations are limited in how much they can respond with more military spending,” Earle says. “The knock-on effect could be lower-than-expected military spending.”

Even countries with money may face a challenge. Defense is a small part of the American economy, but it’s close to full utilization, says Peter Tchir, head of macro strategy at financial company Academy Securities. And defense contractors may be reluctant to build more factories if the government changes its mind. “Defense work helps the economy, but we need to build factories to really crank up production,” Tchir says. “I am not sure how fast that can be done.”

Photo Credits: Anton Petrus/Getty Images