The following is a freely accessible summary of a published Citi Research report.
A new Citi Research report from a team led by Arkady Gevorkyan looks at trends in nuclear energy and how the next decade looms as a pivotal point for global growth.
Nuclear energy, one the largest low-carbon sources of electricity, is poised for global growth thanks to such drivers as the potential acceleration of new technologies, net zero aspirations and the importance of low-carbon sources of power. While we&rsquo;ve observed different trends between developed-markets and emerging-markets economies, the majority of countries are considering keeping or expanding nuclear energy in their energy mixes.
Why do we see the next decade as pivotal for nuclear energy&rsquo;s prospects? One reason is that small modular reactors (SMRs) and advanced reactors (ARs) are set to shape the technology&rsquo;s future, sealing its role in the energy transition and the broader energy mix. As SMRs are getting ready to be scaled, new factors could influence nuclear energy&rsquo;s future in the U.S., including coal-to-nuclear switching, the demand growth for data centers driven by AI, and serving distant areas for oil &amp; gas exploration. Such discussions are notable because the U.S.&rsquo;s 95 operational nuclear reactors are the highest number globally, and nuclear energy represents close to 20% of its broader energy mix. &nbsp;
In our base and bull scenarios, global nuclear-energy capacity will experience meaningful growth between now and 2050. At the COP28 climate-change conference, more than 20 countries committed to tripling their nuclear capacity by that date. (Projections are for nuclear-energy capacity in the U.S. to increase 12%.)
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6669c6ae9bee100354764eaf.png" alt="carts - bear/base/bull scenarios for nuclear capacity globally and scenarios for nuclear energy capacity in the US">
The International Energy Agency sees nuclear-energy generation hitting record highs in the next few years. An additional 29 Gigawatts of new nuclear capacity is expected to come online globally, while existing nuclear plants continue to seek lifetime extensions. In the U.S., we don&rsquo;t expect forced retirements of nuclear plants anytime soon. We do estimate that generation by nuclear energy in the U.S. could see slightly longer down time in the second half of this year due to a number of plants&rsquo; refuelment schedules, and such down time could drive more demand for other energy sources. (Historically, gas and coal have filled the gap.)
To forecast nuclear generation, we&rsquo;ve developed a robust machine-learning algorithm using a 10-year training period of historical generation data and looking two years ahead. We include outages associated with the refuelment cycle and control for the length of those outages. The accuracy ratio for an out-of-sample two-year period is at 94%. Uranium demand also correlates closely with that schedule, as utilities typically need to procure uranium at least two years in advance of a refuelment period. &nbsp;
An industry rejuvenation?
Nuclear energy&rsquo;s development in the U.S. could contribute to global appreciation and adoption of it. At the moment, U.S. discussions of nuclear energy range across a number of topics, which we explore in greater detail in the report.
The past six to 12 months have seen a number of license-renewal applications to the Nuclear Regulatory Commission seeking lifetime extensions for reactors. As a result of such extensions, we project uranium demand will be higher by 3 million pounds in 2030, 13 million pounds in 2040, and 17 million pounds in 2050 &mdash; projections that don&rsquo;t include potential new builds. On average, we estimate, close to 50 million pounds of U308 is consumed annually in the U.S.
The U.S. Department of Energy (DOE) has made a conditional commitment to provide $1.5 billion to reactivate the Palisades nuclear plant, marking the first nuclear-plant restart in the U.S. and setting a precedent. We&rsquo;ve included Palisades in our 2028&ndash;2029 balances for fuel procurement, given its potential restart date of 2030. And there are ongoing discussions about restarting the Three Mile Island Nuclear Generating Station.
The DOE has also advocated for converting retiring coal planets to use nuclear energy, which would require about 200 Gigawatts electric of nuclear capacity, with SMRs seen as playing a key technological role. But we note caveats: The timing on rolling out SMRs must match up with the coal-plant retirements, and an adequate, trained labor force is needed to operate the SMRs. &nbsp;
There are additional nuclear-energy demand factors to consider in pondering nuclear energy&rsquo;s future, including data centers/AI, the oil upstream sector and space exploration. Use cases for SMRs are gaining traction, with the U.S. an extremely attractive market for baseload power.
The U.S. remains a hotbed for SMR development, with supportive policies and available funding. We think SMRs could represent up to 15% of global uranium demand by 2040. We see the possibility that three SMRs could be connected to the grid by 2034, with another five or six connections in the U.S. alone after that. But we also note that nuclear projects, including SMRs, require significant upfront investment. Costs are high due to technological complexity, stringent safety requirements and the need for specialized materials and skilled labor. While the DOE estimates the first-of-a-kind cost of a well-executed nuclear project at ~$6,200 per kilowatt, recent nuclear construction projects in the U.S. have had overnight capital costs of more than $10,000 per kilowatt. That said, subsequent deployments are expected to benefit from technology learning, supply-chain maturity and manufacturing improvements. Those could drive down capital costs and unlock deployment at scale.
Securing financing is an additional challenge due to the history of nuclear projects&rsquo; cost overruns; the transition from large, monolithic infrastructure projects to modular ones may alleviate some uncertainty. Still, recent cost estimates for several SMR demonstration projects have increased more than 70% from initial estimates due to inflationary pressures, supply-chain constraints and evolving designs.
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6669c7024b4cf80a7f1254ab.png" alt="charts-forecast for new AR/SMR builds globally and Number of ongoing SMR projects by country and status by IEA">
Other factors to consider in exploring nuclear-energy trends:
<ul>
<li style="font-size: 16px;">Nuclear energy has bipartisan support, an exception to the norm during a U.S. election year.</li>
</ul>
<ul>
<li style="font-size: 16px;">We forecast AI/data-center growth to increase U.S. total power demand by ~456 Terawatt hours by 2030, the equivalent of ~11% of total U.S. power generation. While we see near-term generation additions coming from gas plants, we also see incremental investment opportunities for the existing U.S. nuclear fleet. Due to nuclear plants&rsquo; seasonality and turnaround schedules, we assume data-center customers would prefer to collocate data centers with nuclear plants in a cluster for improved reliability and stability.</li>
</ul>
<ul>
<li style="font-size: 16px;">The provisions of the Inflation Reduction Act (IRA) could help provide stability. The IRA established a production tax credit of $15 per Megawatt hour on electricity generated from nuclear facilities from 2024 through 2032. This serves as a structural price floor that could prevent downside loss in a volatile market. U.S. regulated utilities with nuclear assets are likely to receive production tax credits that gradually ramp from 2024 through 2027 before reversing in 2032.</li>
</ul>
<ul>
<li style="font-size: 16px;">Long-duration contracts with data-center developers could receive premium pricing, with a recent Talen Energy-Amazon deal providing an example. Incremental power demand from AI/data centers and electrification could drive efforts to improve nuclear plants&rsquo; utilization and deliver incremental capacity uprates.</li>
</ul>

Existing Citi Research clients can follow <a href="https://www.citivelocity.com/t/eppublic/385BK" data-link-source="tiny">this link</a> to access the full report, which also includes sections exploring the potential impacts of nuclear energy trends on commodities and equities.

Accelerating power demand, evolving policy and market trends have heightened the focus on the U.S.'s 95 operational nuclear reactors, which account for ~20% of the U.S. power mix. We look at what may lie ahead and introduce our nuclear-plants generation model.

Inside Nuclear Energy Trends in the U.S.

International Markets

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Macroeconomics

Research

A new Macro to Micro report from a team led by Scott Gruber looks at how U.S. power-load growth through 2030 will be driven by the power demands of new data centers, generating additional demand for natural gas. But determining how much added demand is key to separating potential from hype.
Anything AI-related is getting significant attention, with a spotlight on the theme of AI and data centers driving power demand. Any long-range forecast for a technology growth sector requires broad error bars, but leveraging recent modeling from our Technology and Telecom teams allows us to present a forecast for AI/data-center associated power demand based upon a chip-supply approach. Our base case is for U.S. power demand associated with data centers to jump from ~21.4 Gigawatts (GW) in 2023 to ~52.0 GW in 2030, or from 187 terawatt-hours (TWh) to 456 TWh. As a result, data centers would equate to 10.9% of total U.S. power demand in 2030, up from 4.5% today.
That assumes ~80% of global data-center growth is in North America and ~73% in the U.S. As we translate IT loads to power demand, our assumption is that power utilization efficiency gradually declines in line with historic relationships, and that data-center power capacity utilization levels are ~65%.
Our 2028-2030 base case is built on the implication that U.S. utilities will slow the retirement of coal, gas and nuclear-power plants and execute on plans to build power plants and transmission and distribution infrastructure to keep the lights on. This implies increases of ~4% to ~6% in U.S. utilities&rsquo; capex budgets on average from 2024 to 2030, with large geographic and company-specific diversions in outcomes. These capex increases are driven by ~26 GW of gas new-build plants, some other power resources, and associated infrastructure investments.
While data-center-driven gas demand is certainly positive for the domestic natural-gas market, at least through 2030, the overall market outlook appears more dependent on LNG export growth as well as the depth of low-cost gas inventory to meet rising calls on U.S. gas production. Our bull case for domestic gas assumes healthy demand growth from the power sector and full utilization of LNG plants under construction.
But in our note we go several steps further, including assessing how data-center demand could increase global demand for natural gas. We also investigate how the supply chain may respond to meet the incremental call on gas with respect to incremental gas rigs needed and pipeline requirements.
In a bull case for U.S. natural gas, the data-center-driven growth in power demand for gas is incremental to LNG export growth (~12.6 billion cubic feet per day [bcfd] under construction but with upside), and complemented by other growth drivers of as much as 3 bcfd. That means the call on U.S. gas could grow by ~20 bcfd or more by 2030. In this scenario, growth in low-cost gas appears insufficient to meet the call, requiring activation of Tier II Haynesville/Marcellus acreage as well as Eagle Ford dry gas, Mid-Con gas and S. Delaware gas. We think this would push the marginal cost of gas from ~$2.75 per million cubic feet (mcf) toward ~$3.75/mcf and require ~70 incremental gas rigs.
While the U.S. should remain the leader in data-center expansion, the build-out will likely be world-wide, driving power demand growth. This could in turn increase demand growth for gas and hence LNG. But the data-center expansion will likely coincide with a slowing demand growth profile for LNG given renewables growth in China and nuclear restarts in Japan, to name just two factors. At the same time, LNG production capacity is set to expand by ~24 bcfd based only upon facilities under construction, with a long list of projects in the works. Therefore, we see a risk of oversupply in the global LNG market driving the need to curtail shipments by an estimated ~2 bcfd in 2026, rising to ~9 bcfd in 2030. Moreover, the U.S. may need to shoulder a majority of these curtailments given relative costs; the curtailments could be larger than the incremental gas demand growth from data-center expansion.
A reduction in the potential call on U.S. gas from ~20 bcfd toward 10&ndash;14 bcfd would have a material implication for the marginal cost of domestic gas. We forecast another ~5.5 bcfd of growth from the Permian, ~2.5 bcfd of growth from Dorado and the potential for 3+ bcfd of growth from each of Appalachia and Haynesville. Thus, low-cost basins appear to have the potential to meet all the incremental call if material LNG curtailments arise. That said, we believe there could be modest upward pressure on the marginal cost of U.S. gas from ~$2.75/mcf to ~$3.25/mcf over the next several years based upon resource maturation in Appalachia and Haynesville. From a rig-count perspective, the lower call on U.S. gas would require an incremental ~40 rigs.

Our new report, Data Centers Driving U.S. Gas: Hyperscale or Over-Hyped?, also includes a review of how we forecast global demand for data-center power demand and extensive equity-strategy recommendations. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/35UnN" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Hyperscale or Over-Hyped?

AI-driven power demand has captured the spotlight; the challenge now is separating potential from hype. Data-center-driven U.S. power-load growth through 2030 will generate added demand for natural gas, but the long-term bull case for U.S. gas still primarily rests upon liquefied natural gas (LNG) exports.

Data Centers Driving U.S. Gas

Japan&rsquo;s economy is emerging from 30 years of deflation and has the rare opportunity to shift to private sector led, self-sustaining growth. We explore a roadmap of how this shift might be achieved.
A new Macro to Micro report from a team led by economist Katsuhiko Aiba looks at Japan&rsquo;s opportunity to emerge from 30 years of deflation and shift to self-sustaining growth led by the private sector. The aging of Japanese society has left investors seemingly less than confident about a recovery in consumer spending and sticky 2% inflation, but we see 2024 as the first year of a virtuous cycle of prices, wages and consumption &mdash; though a key factor is whether senior citizens without sufficient savings will participate in the labor force.
The norms for Japanese prices and wages began changing in 2022, as rising prices were fueled by the yen&rsquo;s depreciation and a supply shock, combined with a labor shortage. Wage hikes agreed to in this year&rsquo;s annual shuntō, or &ldquo;spring wage offensive&rdquo; &mdash; where thousands of Japan unions negotiate wages with employers simultaneously &mdash; are now being reflected in regular wages, and we think real wage growth will turn positive for the July&ndash;September time period. This improved income environment should translate to solid growth for Japan&rsquo;s economy starting in this year&rsquo;s second half, with growth driven by domestic demand centered on personal consumption.
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66db1de049e36e74ff0659bd.jpg" alt="" width="100%">
&nbsp;
The increases agreed to in the shuntō represent a permanent rise and so have a big impact on consumption. Real wages fell 2.2% in fiscal 2023, but we forecast that they&rsquo;ll turn positive and grow 0.3% in fiscal 2024. At the same time, we think the wealth effect due to equities&rsquo; gains will support consumption, particularly among older consumers. Past research indicates that each &yen;100 rise in financial assets&rsquo; value adds &yen;2&ndash;&yen;4 to growth in personal consumption. For our purposes, we assume &yen;3 and estimate the boost to personal consumption will turn positive at 0.6% this fiscal year, compared with &ndash;0.4% last fiscal year.
A note of caution, however: While the wage rise is the largest in 33 years, Japan&rsquo;s population has aged during this period, meaning the sensitivity of personal consumption to real wages may have declined. Forty percent of consumers are pensioners, and few of them benefit from wage growth. Workers also pay more of their wages in social-welfare levies than they did 30 years ago. The key question is whether this year&rsquo;s second-half recovery in personal consumption will help sustain inflation and make interest rates meaningful.
If this strength in personal consumption is realized, we&rsquo;d expect companies to increasingly pass on personnel costs via service prices, making Japanese inflation stickier. We project core inflation of 2.5% for 2024 and 2.4% for 2025, following 2023&rsquo;s 3.1% reading. We expect an increase of nearly 3% in base wages in next year&rsquo;s shuntō, given higher inflation, strong corporate earnings and the labor shortage.
Should this scenario come to pass alongside a soft landing for the U.S. and other world economies, we&rsquo;d expect the Bank of Japan (BoJ) to raise rates 25 basis points in December as well as in April, then look to gauge the impact of rate hikes and test the neutral interest rate &mdash; where both inflationary and deflationary pressures are absent &mdash; with hikes coming every six months. While the neutral interest rate&rsquo;s level is very uncertain, at this point we put it at 1.5%, a level we expect the policy rate to reach in October 2026.
Interest rate impacts
The consensus is that interest-rate rises accompanied by an improving economy and wage growth are positive for households overall. The BoJ&rsquo;s modeling, for example, finds that there&rsquo;d be net growth in interest income for the 77% of households that don&rsquo;t have a mortgage; for most households that are repaying a mortgage, each 1-percentage-point increase in short-term interest rates would cause a rise in the net interest burden of less than 2% of disposable income. Because we expect annual growth in nominal wages of around 3% in a regime of economic growth and changes in inflation norms, we foresee income growth after the payment of taxes and social-insurance levies, with most households able to cover the increased interest-payment burden with growth in employment income. However, some older-generation households may not be able to cope with a rise of 2% in the cost of living, meaning the safety net may need to be extended.
Corporate borrowings have grown relative to GDP since the pandemic, but much of this growth has been due to companies building cash holdings due to pandemic-related uncertainties, and a similar amount of cash and deposits has built up on the asset side of corporate balance sheets. From a long-term perspective, companies have come to depend less on borrowings, constraining capex to within the bounds of cash flow. This makes them less sensitive to interest rates; should the economy remain solid, we&rsquo;d expect capex to also remain robust.
According to BoJ modeling of corporate earnings, if interest rates on borrowings rose to around 2%, operating profits would be sufficient to cover interest payments. But we note this is a static simulation; an improved economy would likely drive growth in operating profits, with corporate earnings becoming more resilient in the face of interest-rate rises. Still, the burden of interest payments could be a drag for some small companies, and it may prove necessary to extend the safety net here as well.
A roadmap for productivity improvements
Since the bursting of the Bubble Economy in the early 1990s, improving productivity has been discussed as a long-term issue for Japan&rsquo;s economy. This discussion has grown in importance in recent years given the falling population and labor shortages, with the case made that an increase in inflation could boost the economy&rsquo;s productivity and potential growth rate. The idea is that positive general price inflation improves the signaling functionality of wages and prices, thereby making resource allocation more efficient and having a positive effect on productivity. It&rsquo;s a discussion we find interesting, while noting that at this point it&rsquo;s but a theory, one that will be tested by the economy&rsquo;s actual performance.
If the potential growth rate rises and real wage growth accelerates, we could see a positive cycle in prices, wages and personal consumption; once the start of such a cycle has been confirmed this year, we think the focus will shift to productivity improvements and the potential growth rate &mdash; if the external environment allows.
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<td style="height: 18px;">&nbsp;How heightened inflation can raise potential growth rates, as outlined at a BoJ workshop</td>
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<td style="height: 32px;">Under a product cycle, it is desirable for the relative price of a new product to decline over time after it is introduced, but there is a price rigidity. if the inflation rate is positive, resource allocation may become more efficient as its relative price declines.&nbsp;</td>
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<td style="height: 32px;">Productive firms with high mark-up do not pass on costs much. Under this situation, a guarual rise in general price will encourage a shift in demand to highly productive firms, lending to more efficient resources allocation.&nbsp;</td>
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<td style="height: 32px;">In a market with excessive entrants, if general prices rise and costs increase, it is possible that reductions in markups will encourage companies to exit, correcting distortion in resource allocation.&nbsp;</td>
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<tr style="height: 32px;">
<td style="height: 32px;">Wage rigidity makes it difficult to set wages according to productivity. Under higher inflation rate, ensuring flexibility in wage setting will enhance the signaling functions of wages, make resource allocation more efficient, and lead to increase productivity.&nbsp;</td>
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<table id="rendition_table_4" class="x-rsch-table CIRTable 0 image-table" style="box-sizing: border-box; border-collapse: collapse; margin-left: 0px; margin-right: 0px; margin-bottom: 10px; width: 884px; padding: 0pt 4.68pt; color: rgb(15, 22, 50); font-size: 8pt; line-height: 8pt; font-family: 'Citi Sans Condensed'; background-color: rgb(255, 255, 255); text-align: left; white-space: normal; border-left-style: none; border-right-style: none; height: 51.625px;" aria-label="Figure 9. How heightened inflation can raise potential growth rates, as outlined at a BoJ workshop Source: BoJ, Citi Research If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.">
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Labor-force changes?
There are doubts about whether 2% inflation can be maintained over the long term as Japan&rsquo;s population ages. The optimistic view is that an ongoing labor shortage will help sustain positive wage growth and 2% inflation, but neither of those things will be sustainable if the 3% increase in wage costs that&rsquo;s consistent with 2% inflation isn&rsquo;t passed on in sales prices. And such pass-throughs won&rsquo;t be possible if consumers&rsquo; purchasing power is too weak &mdash; a potential issue given that 40% of the Japanese population are pensioners, not workers.
As the number of people working who are pension-fund members declines, an increase in the adjustment ratio for pension benefits paid can&rsquo;t be avoided. But declines in real pension benefits paid can be offset to some extent by growth in interest income. That said, we don&rsquo;t expect income growth to keep pace with price rises for some households, and so expect increases in labor-force participation.
A decline in real pension income caused an increase in labor-force participation by the older cohort in the 2010s; if the pace of the expected decrease in pensions&rsquo; real value accelerates, we think we&rsquo;ll see another increase in this participation. And, we note, the demand is there from firms facing labor shortages. There&rsquo;s also the possibility of changes to current government policy that pension benefits are reduced for people who choose to work, or the abolition of this policy.
The 1960s saw much higher labor-force participation from Japan&rsquo;s older cohort. While most older people then worked in agriculture, healthy life expectancies have lengthened and an easier work environment (such as remote work) is now taking shape. A situation in which weighting of pensions within older people&rsquo;s total income decreased and the linkage to wages increased could help maintain consumers&rsquo; overall purchasing power, making it possible to sustain a 2% inflation rate. &nbsp;

Our new report, Roadmap for an inflationary era: Outlook for economics, yen rates, equity strategy, and financials, also includes discussion of Japan&rsquo;s outlook from the point of view of yen rates, equity strategy, and financials. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3I8AE" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Japan&rsquo;s economy is emerging from 30 years of deflation and has the rare opportunity to shift to private sector led, self-sustaining growth. We explore a roadmap of how this shift might be achieved.

Japan’s Roadmap for an Inflationary Era

Citi’s Research team leverages expertise across all asset classes and regions to provide our clients with independent analysis of financial markets, economies, industries and companies.

A new Citi Research report suggests that a tipping point is near for AI adoption in China. Our Innovation Lab survey finds AI adoption is widespread but shallow — but once the tipping point is reached, we see potential labor-market impacts and increased momentum for AI governance.

AI Transition: Survey Findings Suggest Tipping Point Is Near

Collaborative analysis on macroeconomic themes and their impact on the industries we cover.

Macro to Micro

<ul><li>The combination of larger-than-expected NATO commitments and swifter, more sizable German spending plans has driven upside surprises in the outlook for European fiscal stimulus.</li><li>Such plans could lift gross domestic product earlier and more substantively, with an extra 0.4 percentage point (pp) added to GDP growth in 2027.</li><li>This stimulus could add to earnings per share growth over the next five years, driving a long-term index re-rating.&nbsp;</li></ul>

In a new Macro-to-Micro report from Citi Research, a team of analysts and economists led by Head of European Equity Strategy Beata Manthey takes a new look at recent European commitments to large fiscal stimulus via infrastructure and defense spending, a note that revisits an earlier assessment of these commitments’ implications.We now expect European Union (EU) spending plans to lift gross domestic product (GDP) earlier and by more, with an extra 0.4 pp added to GDP growth in 2027. And this stimulus could add another 3% of European earnings per share (EPS) growth over the next five years, sparking a long-term index re-rating.In early March, Citi Research explored the macroeconomic impact of Europe’s Re-Arm EU package (since relabeled Readiness EU), which allocates €800 billion, or 1.1% of EU GDP per year, over four years with the objective of reaching 3% of GDP by 2030. Additionally, Germany approved a change to its constitutional debt brake, uncapping defense spending, and unveiled a €500 billion infrastructure fund.There have been several developments since then.&nbsp;<ul style="list-style-type:disc;"><li>The 3% GDP target has been raised to 3.5% for “core defense,” plus 1.5% for “broader defense and security” by 2035.</li><li>Germany has unveiled actual issuance/deficit plans, which envision a budget deficit widening from just below 3% of GDP in 2024 to above 4% by 2027 and staying close to 4% until 2029. While details of how the money will be spent still lie ahead, the new plans amount to a considerable shift in Germany’s fiscal stance compared with expectations at the start of the year.</li><li>No other big EU countries have activated the National Escape Clause, which offers leeway within EU fiscal rules to spend the €650 billion portion of Readiness EU. As for the other portion of Readiness EU — the €150 billion in EU Security Action for Europe (SAFE) loans — several countries have said they’ll apply, but for most EU countries, the cost savings from drawing down SAFE loans is seen as too limited on its own to be an incentive. That said, all countries except Spain have committed to the new 5% NATO target.</li></ul><h2>Studying the macro impacts</h2>Back in March, we estimated that if fully implemented, the planned 1 pp of GDP per year of additional spending would start having an effect on euro-zone GDP in 2026, adding 0.2 pp that year and scaling up to +0.7 pp in 2028–2029. The fiscal impulse in Germany now looks bigger and more front-loaded, with some effects likely seen in the second half of this year.&nbsp;We expect the stimulus from the recent fiscal announcements to be mostly concentrated in Germany. In the rest of the euro zone, lifting defense spending to 3% of GDP per year was already an ambitious goal given fiscal constraints and a lack of fiscal support. The additional 1.5% of GDP could spur additional projects, but we expect actual expenditures will be much smaller and more back-loaded than in Germany. Rising public investment in other European countries is also likely to reduce the room for additional projects.&nbsp;All things considered, we estimate the new spending plans will lift euro-zone GDP a bit earlier and a bit more than our March assumptions. We factor in 5% additional spending cumulatively between now and 2030, compared with our March assumption of 4% by 2029, and assume slightly higher fiscal multipliers.We expect the fiscal impulse to peak in 2027, adding around 0.4 pp to GDP growth, with 0.2 pp added in 2025–2026. Eventually, we see the level of GDP as about 1% higher than our pre-March baseline by the end of 2029.<h2>Implications for equities</h2>Turning to equities, bottom-up consensus currently points to a ~8% Stoxx 600 EPS compound annual growth rate (CAGR) through the end of 2029. Our models suggest the European defense and German infrastructure packages could add another 2% and 1% of EPS growth per year, respectively.&nbsp;A 3% higher five-year EPS growth CAGR is quantitatively associated with a ~1.5x higher 12-month forward price-to-earnings ratio (PE). Europe is already cheaper than what’s implied by our regression and has scope to rerate ~1.5x PE points given such an increase in EPS expectations. An optimistic scenario for a lower equity risk premium could add around 0.5x, resulting in a net re-rating of 10% to 15% over the long term.<img style="border-radius:10px;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/687a492a2f02696d592b49f7.png" width="975" height="648"> In terms of sectors, we see these re-rating dynamics as favoring Cyclicals, Value and SMID caps. We also note that Defense sectors are still “under-owned.” Currently, Defense comprises ~5% of the Stoxx 600 and Germany’s DAX index, with earnings weight of ~2% for both indices. Outside of France, U.S. and European countries generally have similarly small exposures to Defense stocks, which gives indices scope to expand their exposure to such names.&nbsp;German equities clearly stand as primary beneficiaries of both domestic and EU fiscal spending. Analysts’ consensus expects 13% EPS CAGR through 2029, up from expectations for 11% at the start of the year. Our model suggests the additional EPS impact from German stimulus is 2% per year through 2029 after already being revised up another 2% year to date, resulting in a compound growth rate of ~15%.This represents 10% more total German EPS in 2029 vs. current bottom-up scenario forecasts. Calculations using earnings weight suggest such an increase would improve overall European earnings by ~1.5%. But this may be low; historically, when German EPS has grown by 10%, Pan-European EPS has grown by ~6%.Improving economic conditions and market outlooks for Europe could also encourage both domestic and international investors to increase their long-term allocations to European equities, with such flows spurred both by rotation into Europe via diversification away from the U.S. and by more domestic participation from European investors.Europe has seen a flow revival in 2025, with year-to-date inflows of ~2% of assets under management, and we see diversification away from the U.S. as still likely, since global investors have come to “over-own” U.S. equities in past years while underinvesting in Europe. With shifting perceptions around the predictability of U.S. economics, investors could stay desirous of diversifying into markets such as Europe over the medium term.Turning to domestic investors, households have the capacity to increase their equity allocations: According to national accounts, European households only hold ~20% of their savings in equities, compared to ~40% for the United States. Germany is also actively exploring ways to encourage participation by retail investors through a number of policy proposals.&nbsp;

Our new report, European Equity Strategy: European Fiscal Stimulus Revisited — Deep-Dive, also looks at implications for European rates; explores sectors that could benefit; and offers baskets of European stock beneficiaries. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3ytAC">here</a>.

The outlook for European fiscal stimulus keeps surprising to the upside, with larger-than-expected NATO commitments joined by swifter and more sizable German spending plans. This could boost regional EPS growth by ~3% a year over the next five years, justifying higher valuations.&nbsp;

European Equity Strategy: European Fiscal Stimulus Revisited

<ul><li>South Korea’s government is seeking to drive economic growth through 30 flagship AI transformation projects as well as investments in “ultra-innovation.”</li><li>The Bank of Korea sees AI-driven productivity improvements as potentially offsetting a slowdown in economic growth due to an aging population and declining labor supply.</li><li>We’re raising our KOSPI target to 3,700 from 3,600, as we expect AI investments will strengthen South Korea’s national competitiveness and enhance corporate productivity.</li></ul>

In a new report from Citi Research, a team of economists and analysts led by Jin-Wook Kim assesses the potential implications of South Korea's AI transformation and ultra-innovation projects. AI-driven productivity gains could substantially offset a slowdown caused by population aging and declining labor supply. As part of our assessment, we raise our KOSPI target to 3,700 from 3,600.In late August, President Lee Jae-myung’s administration unveiled an economic-growth strategy for AI and ultra-innovation projects, setting strategic technology targets and mobilizing capacities to support the development of leading-edge products. According to Bank of Korea estimates, productivity improvements driven by AI could substantially offset a slowdown in economic growth caused by South Korea’s aging population and declining labor supply. South Korea’s gross domestic product (GDP) is projected to decline around 16.5% between 2023 and 2050, but the AI transition could moderate this decline to a range of ~5.9% to ~13.2%.The government plan selects 30 flagship AI transformation projects across corporates, public and household sectors. In the corporate sector, seven projects look to apply AI to physical manufacturing processes to enhance industrial competitiveness. The projects are earmarked for the robot, auto, shipbuilding, household electronics, drone, factory and semiconductor industries. In the public sector, projects will look to transform welfare/employment, tax administration and new drug review. The government will also boost public data utilization and international cooperation on AI, expanding AI data centers through measures such as tax credits, relaxed regulation and power-supply support.<img style="border-radius:10px;display:flex;overflow:hidden;width:fit-content;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/68b9f5f2865e2e682c9598d9.png" width="975" height="585"> Meanwhile, “ultra-innovation” projects are intended to create new drivers of economic growth. One target is advanced materials and components, with silicon carbide power semiconductors, liquid natural gas cargo tanks, superconductors, graphene and special carbon steel included. Climate and energy projects include solar power, next-generation power grids, offshore wind, high-voltage direct current transmission, green hydrogen, small modular reactors, smart agriculture and fisheries, and ultra-high-resolution satellites.&nbsp;In the beauty and food industry, targets include biotechnology and pharmaceuticals, content, beauty clusters and food.&nbsp;<h2>Finance AI and innovation</h2>The Lee administration’s 2026 budget proposal includes plans to expand research and development spending 19% year over year and expand spending for industry, small and medium enterprises (SMEs) and energy 15% year over year to support these AI and ultra-innovation initiatives. The government also proposes to exempt preliminary economic feasibility analysis to accelerate the pace of public investment in seven strategic technology projects, including AI and semiconductors.The government plans to establish a National Growth Fund valued at KRW100 trillion ($72 billion) via private-public joint financing activities, initiated by private capital and public funding this year. We see South Korea’s National Pension Service as likely to be one of the major financial investors. The public fund is intended to absorb losses before private investment in order to encourage private investment into risky advanced industries. For startups and SMEs, the government will provide equity investment or subordinated debt; for export-oriented companies, large-scale facility investment loans will be offered at interest rates in the 2% range, with direct investment also under consideration.Stepping back, the Lee administration recently formulated a “productive finance” policy to reallocate financial resources from less economically productive fields such as the real-estate market and the household loan sector to more productive ones such as the capital markets and the corporate loan sector. This policy is intended to reform the listed equity market, boost venture capital and ease corporate loans and investment.On the subject of risk factors, we see the AI and ultra-innovation projects strategy as timely and well-positioned, but think more policy consistency and transparency will be needed to boost investor confidence given conflicting policy signals, including a plan to lift corporate taxes. We see recent public investment schemes as largely dependent on policy bank-led bond financing activities to avoid direct burden on the government’s issuance of Korea Treasury Bonds. It will be worth watching how the government manages financing of several public investment schemes without generating an unintended supply shock to the bond market.<h2>We’re raising our KOSPI target</h2>We’re raising our KOSPI target to 3,700 from 3,600, as we expect South Korea’s AI investment to strengthen national competitiveness and enhance corporate productivity. We think the strategic investment focus will boost the growth of the AI-chip supply chain, while the National Growth Fund’s efforts to foster startups will eventually create more opportunities for the semiconductor supply chain. We also see traditional industries such as manufacturing, autos, consumer goods, power and telecommunications as beneficiaries from the initiative, as they seek to leverage AI for future growth. We also project K-beauty and K-food companies as benefiting from government support, as both are part of a broader government focus to globalize Korean products. &nbsp; &nbsp;

Our new report, AI &amp; Innovation Investment: Economic Views / Increasing Our 2025E Kospi Target to 3,700, also takes a sector-by-sector look at equities that could benefit from South Korea’s investment plans. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/rendition/eppublic/documentService/ZG9jX2lkPTMwMzY1MjE2JnBsYXRmb3JtPTEwMCZ2ZW5kb3I9Q2l0aSBWZWxvY2l0eSZjaGFubmVsPUNvcHkgVVJMIExIUyZzdWItY2hhbm5lbD1JbnRlcm5hbA==">here</a>.

In a new Macro-to-Micro note, Citi Research assesses the potential implications of South Korea's AI transformation and ultra-innovation projects. AI-driven productivity gains could substantially offset a slowdown caused by population aging and declining labor supply; we raise our KOSPI target to 3,700.

South Korea’s AI & Innovation Investment

<ul><li>AI chatbot adoption in China is broad but remains shallow, with heavy users signaling a potential tipping point toward faster and deeper usage</li><li>Even at this early stage, AI is delivering measurable efficiency gains, especially for heavy users who trust it for higher order tasks needing reasoning and creativity</li><li>Labor market disruptions have sparked anxiety but remain largely theoretical, with most users expressing a mix of job anxiety and optimism about AI driven income opportunities as policy governance takes shape</li></ul>

A new Citi Research report from a team led by Head of Pan-Asia Internet Research Alicia Yap looks at the possibility that adoption of artificial intelligence (AI) is nearing a tipping point in China, and explores the potential impacts of such a shift.We worked with Citi Research’s Innovation Lab to run a proprietary survey on the adoption of AI consumer products in China, covering 1,800 respondents with broad representation across age groups, genders and city tiers. The survey focuses on how people actually use AI chatbots today — and what that behavior might suggest about productivity, labor market implications and policy direction.&nbsp;The picture that emerges, as explored in our Macro-to-Micro report, is one of impressive breadth but limited depth. AI is already embedded in daily life for many users, yet overall usage intensity and formal workplace adoption remain relatively shallow. At the same time, several indicators suggest China may be approaching an inflection point where adoption and impact could accelerate.Consumer engagement is already high. Nearly 70% of respondents use AI agents or chatbots daily, with average usage of 49 minutes per day. Most users rely on one or two apps, which underscores how competitive the space has become.&nbsp;And AI is becoming an all purpose tool: General search, content generation and work assistance are the most common uses, while travel planning and health related inquiries are also widespread. Patterns vary across demographics: Students gravitate toward homework help, working age adults toward productivity tasks, and older users toward health questions. Content creation is a particularly important use case, especially image generation, with video and other formats trailing behind.Platform backed AI chatbots dominate consumer adoption, but the market isn’t homogenous. Users tend to differentiate providers by strengths such as speed and simplicity, trustworthiness, accuracy and logic, or creative and emotional capabilities. Nearly half of respondents have also experimented with foreign AI tools, particularly in larger cities, often in search of different features or better performance.Despite high engagement, adoption remains shallow. Average monthly usage remains modest relative to overall internet time, and AI related revenues still account for only a small share of gross domestic product (GDP). Our survey data are consistent with this: Only a small minority of respondents qualify as heavy users, spending multiple hours per day with AI. These heavy users, however, behave very differently — and their behavior may matter disproportionately.Heavy users are more engaged, rely more on AI for work and idea generation, and expect to increase usage more rapidly than the average user. They also display higher trust in AI’s outputs and are more willing to use it for higher order tasks involving reasoning or creativity. This pattern points to a J shaped adoption curve, where early adopters drive deeper usage that eventually spreads more broadly. In this sense, current adoption may understate future momentum.Even at this early stage, efficiency gains appear meaningful. Using trust in AI outputs as a proxy for time saved, we estimate that respondents may already be saving about 30 minutes per day on average — equivalent to some 4.3% of waking hours. Adjusted for overall penetration, this suggests an economy wide efficiency gain of around 1.8%. For heavy users, the gains are far larger, reflecting a compounding effect between greater usage, higher trust, and more advanced applications. As adoption deepens, productivity impacts could accelerate.By contrast, the labor market effects of AI remain largely potential rather than realized. Our earlier macro work suggested that AI could affect roughly 31% of jobs in China, with around 9.6% facing displacement risk. Survey evidence indicates little of this has materialized so far, largely because AI use is still more personal than institutionally driven. Employers are increasingly aware of AI’s relevance, but formal workplace deployment remains limited.Sentiment around AI reflects this early stage. Most respondents believe AI will replace many jobs in general, but views are more divided when it comes to personal job security. At the same time, a majority believe AI can improve earnings opportunities. This combination of substitution anxiety and complementarity optimism closely mirrors our macro framework. Heavy users tend to hold both views most strongly, while younger respondents — despite lower adoption — show the highest job insecurity, consistent with greater exposure among junior roles.Finally, policy is beginning to catch up with technology. AI governance in China is gaining momentum, with a clear emphasis on human centric deployment and safeguards against misuse. Beyond governance, policymakers appear focused on ensuring broader distribution of AI’s gains, including measures to improve work life balance and gradual progress on fiscal reforms. Taken together, the survey suggests an economy still early in the AI transition — but one that is steadily moving toward deeper adoption, greater productivity impact and more visible labor market implications.

Our new Macro-to-Micro report, AI Transition: Survey Findings Suggest Tipping Point Is Near, also considers use cases for AI and top picks among stock names. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/4OwP3" target="_blank">here.</a>

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