Europe's heatwave raises concerns over long-term economic impact

International

Economists warn that extreme temperatures are becoming a structural risk for growth, productivity and inflation

Europe's latest heatwave is increasingly affecting economic activity, with experts warning that extreme temperatures are evolving from short-term weather events into a long-term economic risk. Germany, Europe's largest economy, is expected to be among the countries most affected as climate change increases the frequency and intensity of heatwaves.

Heat increasingly affects economic performance

Record temperatures across France, Germany, the UK and Switzerland during June disrupted transport, strained infrastructure and affected energy production. In France, two nuclear reactors were temporarily shut down because of insufficient cooling water, while hospitals in several countries reported problems linked to cooling systems and IT infrastructure.

According to Carsten Brzeski, Global Head of Macro Research and Chief Economist for Germany at ING, heatwaves have become an important economic indicator.

“Thermometers, it turns out, have become a leading indicator of economic growth,” he said. “Heatwaves pose a new downside risk to European growth.”

Germany among the most exposed economies

Brzeski argues that Germany is particularly vulnerable because much of its infrastructure, housing stock and labour-intensive industries were designed for a cooler climate.

Studies cited by ING indicate that reduced labour productivity during Europe's major heatwaves has already lowered economic output by 0.3 to 0.5 percent across the continent, with losses exceeding one percent in the hardest-hit regions. Additional costs arise from higher energy demand, transport disruptions, drought, healthcare expenses and lower agricultural yields.

The European Central Bank has also warned that heatwaves and drought could significantly increase food prices as crop yields decline.

Adaptation becoming an economic priority

According to Allianz Trade, Germany could face cumulative GDP losses of around US$131 billion between 2026 and 2030 as a result of extreme heat. France, Italy and Spain are also expected to incur substantial economic costs through lower productivity and higher energy consumption.

Brzeski said climate adaptation must become a priority, pointing to World Bank recommendations for greater investment in building insulation, shading, cooling systems and more resilient infrastructure to reduce the long-term economic impact of rising temperatures.