United Kingdom Defence and Security Report Q3 2009

As the recent procurement cuts underline, the UK defence industry is hostage to the macroeconomic environment and spending priorities of the government. The current deep recession, huge budgetary deficits and collapsing house prices have seriously harmed consumer and investor confidence in the economy. As a result, certain procurement programmes could come under closer scrutiny owing to the Smart Acquisition initiative, and be more susceptible to an early closure. BMI has revised down its UK real GDP forecast for 2009 from -3.5% to -4.2%, and has left our 2010 forecast at 0.0%. The dire Q109 numbers have been a major driver behind our revisions and we also note the ongoing increase in the volatility of real GDP growth. UK real GDP growth declined by 1.9% q-o-q and 4.1% y-o-y in Q109. Despite the distressing economic figures, in May 2009 the UK government announced that it would be purchasing a third tranche of Eurofighters with the contract likely to be signed by the end of the year. The future of the contract had been in doubt as economic recession has severely impacted the main partners in the Eurofighter programme – Britain, Germany, Italy and Spain. Under a longstanding agreement, the UK had originally been planning on acquiring 88 Eurofighters as part of the third tranche of the contract. This has now been reduced to 40 after a compromise deal was agreed. Of these 40 aircraft, 24 have already been promised to Saudi Arabia, with the remaining 16 set to cost the UK US$1.6bn. The Eurofighter is being built jointly by BAE Systems, European defence giant EADS and Italy’s Finmeccanica. According to the Society of British Aerospace Companies (SBAC) the decision will ‘go some way to sustaining the UK as a centre of excellence in aerospace defence and safeguarding jobs but will also help boost Typhoon's prospects of winning the substantial export orders our economy needs.’ In April 2009, the Stockholm International Peace Research Initiative (SIPRI) announced that the global arms trade had expanded by 20% since 2004, driven mainly by the Middle Eastern and Asian markets. The five biggest arms suppliers in the world were the US, Russia, Germany, France and the UK, while China is largest recipient, followed by India. The UK’s largest markets are the US and India. Indeed India is receiving 66 Hawk-100 trainer aircraft as well as 20 Jaguar-S fighter aircraft from the UK. Meanwhile, later this year the UK will begin the first phase of delivery of Eurofighters to Saudi Arabia. According to government figures, quoted in the Guardian, the British government approved arms sales to Sri Lanka worth GBP1.4mn in Q108, compared with under GBP1mn in 2007. In terms of security, in April 2009 it was reported that more than half of those arrested in the UK on suspicion of terrorism, since the 9/11 attacks in 2001, have been freed without charge. The British government has reported that of the 1,471 people arrested, 819 have been released while just 102 were found guilty of terrorism offences. A further 92 were found guilty on charges relating to terrorism. The relatively large number of arrests has been the result of an increase in activity from the British security services following the terrorist bombings on the London Underground in July 2005.