Europe’s defence splurge will help industry – but by how much?

For decades Europe has enjoyed a peace dividend, free-riding under the US-provided security umbrella. Russia’s assault on Ukraine shattered that illusion, prompting a rethink that has been buttressed by the sudden shift in US policy and its stance towards the war and Europe more generally.

What you will learn:

• Our baseline forecast now assumes that European defence spending will rise to 3% of GDP by the end of the decade. This could give a growth boost to Europe’s ailing industrial sector, as we expect much of the spending gains to go towards equipment outlays, which have nearly doubled since 2021.
• A few governments have adjusted their official guidance so far. The Czech Republic now aims for 3%, up from 2%. Denmark’s announced ramp up will lift it above 3% defence spending. However, there is little clarity on the plans of the Big Four Eurozone economies, which will have a large impact on the overall gains.
• We think equipment procurement will be the main beneficiary. In our central scenario, annual equipment spending quadruples to nearly 1.5% of GDP from 0.3% of GDP pre-Ukraine war.
• The boost for some European industrial sectors will be sizeable. But the impact on the overall economy will be diluted because we expect a low fiscal multiplier and a high import share. EU governments are aiming for greater self-sufficiency, but domestic industry may struggle to ramp up production quickly, so US producers are set to benefit at least initially.