How Heat Waves Are Becoming an Economic Factor

Heat waves in Europe are becoming more frequent and intense, and so are their economic consequences. As temperatures rise, not only do the burdens on people and the environment increase—the economy is also feeling the effects.

According to a study by Allianz Research published in May, the number of extreme heat events worldwide has increased sevenfold since the 1980s. Europe is particularly hard-hit by heat waves, partly because of its aging population and the fact that, compared to other countries, air conditioning is still not widely used.

The critical threshold is 30 degrees

The economic impacts of heat waves are not proportional to the rise in temperature. Experts consider a temperature of 30 degrees to be the critical threshold beyond which extreme heat waves suddenly lead to sharp drops in productivity. In their model, Allianz economists calculate a productivity loss of $1 per hour worked, or 3 percent, for every additional degree in the 30 to 35-degree range.

The resulting losses in tax revenue are even greater under progressive tax rates. Although hourly wages fall in tandem with productivity, this happens with a time lag. In the short term, this leads to higher labor costs for companies. According to the Allianz study, this effect, combined with higher energy costs for cooling, also weighs on companies’ profitability.

Southern countries are particularly affected; positive effects are seen in northern countries

Below the 30-degree mark, the positive effects of the heat—such as lower heating costs—predominate. This is also evident in cross-country comparisons of the effects of heat. While northern countries such as Canada, Sweden, and Finland still benefit from heat waves, productivity declines sharply in warmer regions.

An econometric analysis by Allianz Research, based on data from 35 countries covering the period from 1997 to 2023, reveals a clear disparity among countries. According to the analysis, the more northerly countries—the United Kingdom, Sweden, Finland, Norway, and Ireland—actually benefit from heat waves, with increases in hourly labor output ranging from 2 to 3 percent. In these countries, temperatures also remained largely below the key 30-degree mark.

The situation is different in warmer regions. Southern countries such as Slovenia, Italy, France, and Australia were hit hardest by the heat, suffering productivity losses of up to just under 3 percent.

As of July 1, 2026

Sectors particularly affected: agriculture, construction, and tourism

Heat waves also have varying degrees of impact across different industries. “A major problem” arises for agriculture, for example, as Wifo economist Marcus Scheiblecker recently explained in an interview with the Austria Press Agency (APA).

Heat waves are occurring more and more frequently from June through September, rather than just in the middle of summer as they used to. However, many crops cannot tolerate extreme heat over extended periods, especially without adequate irrigation, according to the economist. Naturally, agriculture in southern regions is particularly affected. In Italy, industry associations have already warned of drastic impacts from the recent heat waves on wine and rice production.

New “obstacles” are also emerging for construction, though they may not be long-lasting. Different construction schedules and stricter heat regulations may become necessary, according to Scheiblecker. A shift to cooler seasons is likely, but this could drive up costs, as more construction would have to take place during shorter periods in the spring and fall. “There could be a lull in construction during the summer, just as there has been in the winter,” the expert said.

Scheiblecker expects city trips to become less attractive during the hottest months of the year. In the healthcare sector, higher costs are also looming, as more hospitalizations due to the heat are expected. Air conditioning manufacturers, on the other hand, are bracing for a boom, as the Handelsblatt learned from leading German producers. In 2024, manufacturers produced around 317,000 air conditioners in Germany alone. That represents an increase of more than 90 percent compared to the previous year.

A heat wave caused electricity prices to rise significantly at times

Naturally, the energy sector is particularly affected by heat waves, as demand for electricity to power cooling systems and air conditioners rises. This was also evident during the most recent heat wave in the electricity prices on Europe’s energy exchanges, which at times skyrocketed. Such high electricity prices are unusual, especially for the summer months. Comparably high levels were last recorded in 2022, after Russia’s war of aggression against Ukraine triggered an energy crisis.

Electricity demand is particularly high in the evening. That’s when homes, offices, and industrial facilities all have to contend with the heat, explained Christoph Maurer of the consulting firm Consentec in an interview with the *Handelsblatt*.

Note: Forecasts are not a reliable indicator of future performance.

The Allianz study also naturally identifies a noticeable disparity in electricity demand between cooler and warmer regions. According to the study, in hotter countries such as Egypt, China, Senegal, and Spain, electricity demand rises by between 2 and just under 6 percent during heat waves compared to a 20-year average. Cooler countries such as Ireland, Norway, the United Kingdom, and Finland have even benefited from lower heating costs in the past. However, the study’s authors warn that these positive effects are likely to erode in the future as temperatures continue to rise.

Against the backdrop of rising electricity demand, renewable energy is once again coming into sharper focus. “Recent forecasts predict a significant increase in electricity demand in the coming decades—not least due to the rapid expansion of AI infrastructure,” emphasizes Alexander Weiß, manager of the environmental equity fund at Erste Asset Management.

Renewable energy could play an important role here as a cost-effective and readily available energy source for meeting electricity demand, the expert continues. “In this context, grid infrastructure and battery solutions are also key growth areas that we are specifically targeting in the ERSTE GREEN INVEST environmental equity fund,” says Weiss.

Conclusion: Climate risks are coming more into focus

Extreme heat has long been more than just a weather phenomenon. It is changing production conditions, supply chains, energy demand, and investment decisions. For investors, it is therefore becoming increasingly important to assess how well companies are prepared for these developments.

At the same time, new opportunities are emerging. Investments in energy efficiency, renewable energy, smart grids, and solutions for adapting to climate change are becoming increasingly important. Companies that develop innovative responses to these challenges could gain long-term momentum from this structural change.

 

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