Defence contractors are navigating a challenging environment marked by rising demand, production constraints, and limited international cooperation, according to a new report from Oxford Analytica and Willis, a WTW business.
The report draws on interviews with senior executives across the defence industry. It outlines five economic risks currently facing the sector.
These include the scale/sovereignty trade-off, where nations weigh the efficiency of pooling defence resources against maintaining national control. Tariff wars also pose challenges, with escalating trade barriers affecting supply chains and costs.
The report also points to China dependence, citing the sector's reliance on Chinese materials and components, including rare earths and electronics. Phantom spending is another concern, referring to political pledges on defence budgets that may not result in actual investment.
The fifth risk involves the failure to reindustrialise, as Western nations recognise the need for industrial capacity but encounter obstacles in rebuilding it.
These findings align with broader industry concerns. The World Economic Forum's Global Risks Report 2026 identifies "geoeconomic confrontation" as the most likely trigger of a material global crisis this year, selected by 18% of respondents and displacing armed conflict from the top of the list.
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Beyond these issues, interviewees identified two emerging threats linked to fiscal pressures: social backlash against defence spending and potential fiscal crises. With debt-to-GDP ratios exceeding 100% across much of Europe, North America, and Japan, governments face the possibility of "soft defaults" through inflation or financial repression.
The report suggests that rising defence budgets could generate political friction if they result in higher taxes or reductions to social programs. On European defence procurement, spending is expected to remain steady regardless of whether the conflict in Ukraine continues or a lasting ceasefire is reached.
Sam Wilkin (pictured above), director of political risk analytics at Willis, said that in the late 1990s and early 2000s, terrorist threats dominated the national security agenda during a period of relative geopolitical stability.
"Today, that stability has vanished," Wilkin said. "Non-state actors remain disruptive, but the last few years have been shaped by the return of state-sponsored violence."
He added that these threats have driven a surge in defence procurement and a reshaping of global defence supply chains, with significant implications for operations and future planning.
