The defence industry is experiencing surging demand amid an increasingly volatile geopolitical landscape, but is constrained by lagging production, economic nationalism, fiscal fragility, and supply chain risks, according to a new report from Oxford Analytica and Willis, a WTW business.
The report draws on in-depth interviews with senior executives across the defence industry. It outlines structural challenges the sector faces, driven by an unexpected surge in demand while facing several risks.
The report identified five economic risks currently confronting the defence sector, including struggles with the scale/sovereignty trade-off, as nations balance pooling defence resources for efficiency with preserving national control.
It also highlighted the risk of tariff wars, with escalating trade barriers disrupting supply chains and raising costs, as well as continued dependence on China, given the sector’s reliance on Chinese materials and components such as rare earths and electronics.
Another risk is phantom spending, where political pledges to increase defence budgets may not translate into actual future investment.
The report also flagged the failure to reindustrialise, as Western nations rediscover the need for industrial capacity but face difficulties rebuilding it.
Beyond these current concerns, interviewees highlighted two emerging threats linked to fiscal pressures: social backlash against defence spending and looming fiscal crises.
With debt-to-GDP ratios exceeding 100% across much of Europe, North America, and Japan, governments face the risk of “soft defaults” through inflation or financial repression. Rising defence budgets could create political grievance if they result in higher taxes or cuts in social programmes, especially amid uncertain economic growth. These pressures may undermine long-term defence commitments and create political instability.
Sam Wilkin, Director of political risk analytics at Willis, said, “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.”
