2025 European heatwave: An assessment of economic impacts

Extreme and, in some cases, record-breaking temperatures have descended upon Europe since mid-June. In some cases, the heat wave has resulted in a loss of life. The economic implications are far-reaching and span many countries throughout the continent. Autobahns are cracking in Germany, hundreds have been hospitalized in France, wildfires have claimed lives in Spain, red alerts are being issued in Italy, a nuclear reactor has been shut down in Switzerland, and thousands have been evacuated in Turkey.

Cost

Extreme temperatures in Europe are ongoing, and economic costs compounding. While the full cost of this year’s heatwave is not yet evident, Moody’s Analytics climate risk analysis can help to put the economic implications into context. Heatwaves cost the global economy roughly 1% of GDP at present time, a proportion that is also relevant to the economies of the European Union. This figure is calibrated by Moody’s Analytics to achieve consistency with the Climate Analytics methodology used by the Network for Greening the Financial System in their benchmark climate risk scenarios that underpin global regulatory climate stress tests.

Under a current policies scenario, where no new action is taken to transition the economy away from fossil fuels, the global temperatures escalates to roughly 2°C above pre-industrial levels. This exacerbates the cost of heatwaves from 1% of GDP today to roughly 3% of GDP by 2050.

Impact channels

There are various impact channels through which these economic impacts are realized:
 

1. Changes in tourism patterns: Travelers cancel their plans as a result of the heat and wildfires. Cancellations reduce revenue for hotels, businesses, and transportation companies, among others. This is a highly important channel, especially in the middle of the summer tourism season.
   
   
2. Business disruptions: This includes hits to economic activity resulting from store closures, reduced or shifted hours, lost working days, or strikes. Almost by definition, if stores are open for fewer hours, or fewer workers are available to produce output, economic activity will decline. Shopkeepers might opt to keep their stores closed in the middle of the summer heat while opening them up in the evening. Others will remain closed entirely. Outdoor workers are physically less able to work in the middle of heatwaves and are more prone to striking.
   
   
3. Human health effects: Rising global temperatures will increase heat-related mortality. Air quality erodes during heatwaves, potentially impacting human health. Moreover, the change in water- and vector-borne diseases such as malaria and dengue fever are responsible for even larger adverse human health effects and the associated productivity loss. Rising global temperatures can lengthen the season and increase the geographic range of disease-carrying insects such as mosquitoes, ticks and fleas, allowing them to move into higher altitudes and new regions. In addition, when climate change forces people to migrate, it increases the risk of spreading pathogens into new areas. Increased risk of vector-borne diseases and other heat-related morbidity will impact productivity, as workers will require more sick days while battling illness or work less efficiently due to illness. Frequent and long-term illnesses could also degrade workers’ skills. Higher heat-related mortality and morbidity will reduce labor force productivity and likely raise public and private spending on health services.
   
   
4. Labor force productivity: Heat’s impact on labor force productivity is an additional negative. Heat stress, determined by high temperature and humidity, lowers working speed, necessitates more frequent breaks, and increases the probability of injury. The impact of heat stress on labor productivity in different countries is highly dependent on their industrial composition. Countries with a greater percentage of their workers in outdoor industries are particularly susceptible to lost productivity. This impact channel could cost the U.S. economy an additional 0.6% of GDP by 2100 in a do-nothing scenario, but developing economies in warmer climates would be much harder hit; productivity could be up to 5% lower in China. The impact on Europe is closer to 1%.

Even more stress?

The NGFS-consistent estimates of economic cost—1% of GDP escalating to 3% by 2050—could even be understated. That is because the NGFS approach used by Moody’s Analytics measures direct effects of the heatwave (Channel 2: Business disruptions), but indirect effects are not included. The NGFS methodology starts by analyzing the percentage of the population impacted by heatwaves and uses catastrophe modeling principes and grid level data across temperature trajectories. Information from the Emergency Events Database (EM-DAT) is used to approximate damages that are leveraged as inputs into NiGEM, the macroeconomic model used by NGFS.

This damage approach does a good job of capturing the business disruption channel, which is the main vehicle through which heatwaves erode economic activity. But capturing the cost of reduced tourism visitation, human health effects, and lower labor force productivity—the so-called indirect effects through which heatwaves hurt the economy—is more challenging. As a result, the economic loss from heatwaves could even exceed the 1% of global GDP estimate.