The defence sector faces a widening set of economic, political and supply chain risks, despite strong demand for military capability. Production constraints, limited international coordination and rising fiscal pressure are undermining the sector’s ability to respond to growing geopolitical instability, according to analysis from Oxford Analytica and Willis.

Meanwhile, demand for defence equipment is surging while industrial capacity, particularly in Western economies, continues to lag. European defence procurement is expected to remain robust whether the war in Ukraine continues or moves towards a lasting ceasefire, as governments prioritise rebuilding military readiness under either scenario.

Willis and Oxford Analytica identify five main economic risks confronting defence contractors, including the tension between achieving scale through multinational collaboration and retaining national sovereignty, the impact of tariff disputes on costs and supply chains, and continued dependence on China for critical materials such as rare earths and electronics. Further, political pledges to raise defence spending may not translate into sustained investment, and efforts to reindustrialise Western defence capacity are proving difficult after decades of offshoring.

Sector experts also flag emerging risks linked to fiscal stress. Rising defence budgets risk public backlash if they result in higher taxes or cuts to social spending, particularly as debt to GDP ratios exceed 100% across much of Europe, North America and Japan. Governments facing these pressures may turn to inflation or financial repression as forms of soft default, potentially weakening long-term defence commitments and increasing political instability.

Sam Wilkin, director of political risk analytics at Willis, commented: “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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