 Roger Bootle
Defence spending spree can transform our economy – if we do it right
A complete review of Britain’s productive capacity is needed for rearmament to be successful
Within Europe, just about all countries are looking to increase their defence spending, although by varying amounts.
In Asia, China, India, Japan, Taiwan and South Korea are also planning major increases in defence spending.
Admittedly, in North America, the United States may actually reduce spending somewhat as President Trump seeks to draw back from commitments to Europe. But Canada (while it is still an independent country) is likely to join the Europeans in raising its defence spending. What are the implications for the economy?
It is well recognised that increased defence spending played a major role in dragging the world economy out of the Great Depression in the 1930s. This was particularly true in Germany, of course, but by the late 1930s the UK was also re-arming fast.
Meanwhile, increased demand from the UK and some other countries helped to rescue America too. And during the Second World War itself, owing largely to defence spending, in both the US and the UK economies were running at full steam.
Naturally, we are not yet in the same camp with regard to the scale of increased spending but we can learn some lessons from that period about the economic effects.
First, in order for a boost to demand from increased defence spending to come through in increased output rather than increased prices, there has to be spare capacity in the economy.
That is what marked out the 1930s as being special: there was spare capacity aplenty.
By contrast, in most of the developed world today there is not a great deal of under-used capacity. Accordingly, there is a serious danger that if aggregate demand enjoys a significant boost, the effect would be felt mainly in higher inflation.
But how government spending is financed is the major issue. If it is financed by cutting other sorts of government spending, or by raising taxes, it is not at all obvious that demand would be boosted.
Admittedly, different sorts of spending can have different effects on aggregate demand. But this is second order stuff. The most reliable way to boost demand would be if extra defence spending were financed by money printing (but that carries its own dangers) or by higher borrowing, which would tend to increase interest rates and bond yields.
That would attenuate the scale of any increase in demand.
The potential effect on aggregate demand and hence on short-term economic performance, though, is far from the be-all and end-all. There are strong potential links between defence spending and productivity growth through the impact on research and development and on innovation.
During the Second World War and the Cold War, major technological developments had their origins in military expenditure and the drive to improve the performance of the armed forces through technological innovation and advance.
It is not difficult to see something similar happening now, especially with regard to artificial intelligence and drone technology.
How is the UK placed in this global picture? The increases in defence spending already announced are set to have minimal impact on aggregate demand.
The initial increase from 2.3pc to 2.5pc of GDP is peanuts. It is true, however, that by financing this through a cut in the overseas aid budget (which would have been mainly spent abroad), the net effect on domestic demand should be positive.
But we still don’t know how the Government will finance a proposed further increase in defence spending to 3pc, bruited to be achieved in the next parliament, let alone the much higher spending that may prove necessary.
The choice will be between increased borrowing, higher taxes or reduced spending. Regular readers will know that my preference is for deep cuts in spending, focussed on welfare, with the end of the payment of interest on commercial banks’ deposits at the Bank of England providing something of a hybrid option.
There are implications for the economy well beyond all this. What President Trump has managed to do is effectively to end the whole post-war architecture governing foreign relations and security.
Part of any reasonable defence strategy must surely include making a country’s sources of defence materials and other vital supplies relatively independent and robust in the face of changing international relationships.
Most European economies have historically imported a huge proportion of their defence requirements from the United States. They will now be looking at this afresh and wondering whether instead they have to be more self-reliant. This also applies to the UK.
We are and should remain strong supporters of free trade. In so far as if we can trade safely then we should, without resorting to protectionism, which is economically debilitating. But the world has changed dramatically. There are now much stronger arguments for favouring domestic production of strategic goods.
One effect of all this is that there should be something of a boost to the manufacturing sector within most Western economies, if they have a presence in defence.
Fortunately, the UK is in a relatively strong position, with both BAE Systems and Rolls Royce, as well as a host of smaller players. Yet our position in the global pecking order with regard to defence output is far weaker than you might assume.
We are only the 7th largest defence exporter in the world, well behind France and even slightly behind Italy.
The planned Strategic Defence Review cannot come soon enough. But this is going to be a time when we really need co-ordinated government. Effective defence can only function in the context of an effective economy.
We need the review to be linked to an in-depth study of what it will require for our country to remain resilient in the face of external threats. This should encompass a deep look at our economic structure and economic policy, including the strategic effects of our drive towards net zero. Nothing should be off the table. |
An interesting article appeared in The Daily Telegraph yesterday titled:
“Defence spending spree could transform UK.”
It mentioned BAE and Rolls-Royce as key players in this transformation.
Sorry I couldn’t copy the link, but it was a very interesting read. |
Never hurts to take a profit but if you don't need the money.,,, don't sell is my advice. Strap yourself in and buy baby buy, |
Not impossible over the next t few years did these beauties to reach fifteen sixteen pounds. So a doubling from the current levels. Can you hear the beat of the war drums? |
Rolls-Royce SMR was delighted to host a U.S. delegation to its Module Development Facility at the The University of Sheffield Advanced Manufacturing Research Centre’s Factory 2050 recently.
Delegates from State Utility Commissions of Florida, Washington, Virginia as well as Utah, and Indiana Office of Energy Development heard how Rolls-Royce SMR’s ‘factory-built’ nuclear power plant uses a modularised construction and assembly approach to reduce the time and cost of SMR deployment around the globe for a range of applications. |
"Over the past two years, we've seen our Trent XWB-97 order book double, with our customer base now twice as large as the competition. This demonstrates the trust placed in the Trent XWB-97 and in our commitment to always staying ahead. "
Source: RR |
Your MoneyFrom tech to tanks: the rise of Europe's magnificent sevenDefence stocks have trumped the US's magnificent seven techs and generated five times the returns of the S&P 500 over the past year . Proinsias O'MahonySat Mar 15 2025 - 05:15European defence stocks are the new magnificent seven, says eToro, which notes a basket of seven European defence stocks BAE, Rolls-Royce, Rheinmetall, Thales, Dassault Aviation, Safran and Leonardo is up 46 per cent in 2025, 68 per cent over the last year, and 268 per cent over the past five years. The "European defence seven" has beaten the US's magnificent seven and generated five times the returns of the S&P 500 over the past year.Investor appetite is evidenced in the launch of WisdomTree's Europe Defence fund, the first ETF to focus solely on European defence names. Money has flooded into other European defence ETFs like VanEck's Defense ETF (DFNS) and HANetf's Future of Defence ETF (Nato), although both DFNS and Nato are also exposed to US defence companies.Sceptics might caution that thematic ETFs often launch near the peak of an overvalued theme. There certainly has been, says Barclays, an "element of euphoria" among European defence stocks, with any progress towards a truce in Ukraine likely providing an "excuse for profit-taking". The sector now trades at 21 times estimated earnings, a record high premium since the 1990s. While "frothy", Barclays is long-term bullish. Yes, there have been huge gains since Russia invaded Ukraine in February 2022, but they remain "far from the average peak" seen in previous market hypes. Defence stock gains reflect higher earnings (up 50 per cent since February 2022) as well as higher valuations. Barclays estimates additional European defence spending of $140 billion in coming years, or 110 per cent above current levels. About 60 per cent earnings growth is currently priced in.Barclays' take: the European defence earnings supercycle will accelerate; buy the dips. |
1carus , so do I ;) |
I am always nervous about knew funds. ISHARES have a defencecetf too! Quite like the look of NATP to be honest. TheGrafter.. I have a lot of RR. |
Yes thanks |
WDEF in euro, WDEP in GBP |
The newly launched etf from Wisdom Tree Europe Defence ETF ticker WDEF holds 6% RR |
I also hold RR and NATP |
1carus, I have a 'basket' of defence shares, which I think will do very well. There is another ETF defence one just introduced but I can't remember the ticker. If I remember I'll post it. regards, s/f |
1carus , Rolls Royce are only just getting going , hell of a ride so far but the future looks amazing ;) hold tight ! |
Thanks, with the current climate I can only see the expenditure increasing. Most of these ETFS are up 25-38% (NAPT) in the last year and most of that in the last qtr. Well done Scottishfield. You could look at it as these are over done, but they have not exactly double or triple bagged either.... and I guess defence has been out of favour up until recently. 3 years of war in Europe and no real extra spending up until now. Maybe it is time to dip into this despite missing the initial 25%. |
NATP is one I hold 1carus. I'm a holder here also. |
Reeves to announce £2bn defence boost to secure more orders from allies |
on that note, there seems to be a few etf's for defence. Although sometimes you see something like RR at a very low entry price, not so much at this moment in time for defence stocks... so I am considering an etf where risk is technically spread a little rather than going all in on one stock... way out of my comfort zone here with RR from that point of view... a good problem to have I guess. Anyone else been looking at etf's in this area lately? ( Slight thread digression I know... but relevant I think) |
Cev for a large shareholder as yourself that's a bit of a silly question if you read the asset managers x 2 previous posts , and the TR1 will only be triggered when passing roughly 265 million shares, as to when the asset managers start buying is up to each to judge, but Europe has to find an answer to the very large defence spending coming and it looks like they are turning to the asset managers. Hold on to your hat !! |
Thegrafter, I've been away, can you bring me upto speed.
Ok, there was a share price fall of over 8% when, Wednesday?
Are you suggesting MM manipulation?
Are you suggesting 109 million traded on Monday is going to lead to a TR1 submission.
Re asset managers, why are institutional investors suddenly interested?
What am I missing here? |
We also have a good idea now of why the drop and the 109 million shares traded on Monday !! Until they breech the threshold we don't know who has been buying, yet ! |
It is going to get very interesting very soon Skinny ;) |
It's going to be interesting to see the share price movement when those asset managers start buying into Rolls ;) |
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