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BMI View: Weaker economic growth as a result of the Brexit vote in 2016-2017 will likely force the MoD
to revise its plan for a 3.1% real term increase in defence spending out to 2020. Defence expenditure will
still remain above the 2% of GDP NATO-stipulated target, amid rising security threats from Russian
aggression, terrorism and cybercrime - allowing the Ministry of Defence to move ahead with key
procurement programmes. The Brexit vote will create uncertainty in the local defence sector and could lead
to reductions in FDI and R&D funding in the next few years. However, longer-term potential for industry
development and export growth remains strong, amid robust government support and as local companies'
technologically-advanced capabilities continue to attract investors.
? Following the Brexit vote, our Country Risk (CR) team has downgraded its real GDP growth forecast for
the UK in 2016 and 2017 to 1.4% and 0.2% respectively - significantly below the forecasts used as a
basis for the Ministry of Defence (MoD)'s spending review. Consequently, we believe the MoD will have
to downwardly adjust its 3.1% real growth target for defence spending in the period to 2020.
? According to the 2015 Defence Equipment Plan (DEP), published in October, the MoD planned to spend
GBP68.5bn on the procurement of new equipment over 2015-2025. The SDSR, published in November
2015, added another GBP12bn out to 2020. However, with the pound having depreciated and overall
economic growth negatively impacted by the Brexit vote some procurement programmes considered nonessential
may see cuts or delays.
? The Brexit vote has created uncertainty regarding the future of the country's defence industry. This
uncertainty could, in the short-to-medium term negatively impact FDI into the local defence sector. It
could also limit, to some extent, EU funding for defence research and development (R&D) in the UK in
? We expect the Brexit vote to have a relatively limited impact on the UK's defence industry collaboration
with the rest of Europe, as such programmes are independent of the EU, usually organised directly by the
participating states or through OCCAR.