European Economics Analyst The Potential Impact of Heatwaves and Wildfires on the Euro Area Economies

Economics Research 6 August 2026 | 5:34PM BST

The Potential Impact of Heatwaves and Wildfires on the Euro Area Economies

n July delivered one of the hottest months on record in Europe, raising questions Katya Vashkinskaya | about the potential economic repercussions of heatwaves. Empirical estimates Goldman Sachs International suggest that summer heatwaves have a notable impact on the economy, with recent ECB work pointing to significant cross-country differences in the effect on growth, inflation, and sectoral activity. We thus estimate the potential effect of heat-induced climate events on growth and inflation for the Euro area economies. n Using a country-specific measure of heat intensity, we estimate statistical (Bayesian vector-autoregressive) models for each country. We find that the effect of heatwaves manifests via a demand-driven adjustment. In France, Italy and Spain, an extreme-heat day lifts real GDP by 0.02-0.04% over the following 12 months, with headline inflation modestly higher, while in Germany real GDP (-0.02%) and headline HICP both fall slightly following the shock. n On top of the record heat, European wildfire activity increased sharply in July, especially in France. Re-estimating our baseline models with a wildfire pressure index, we find a negative GDP but a positive headline HICP response in all four countries after one year. A one-standard-deviation wildfire shock shaves around 0.2% off the real GDP level in France and Germany, with more limited hits elsewhere, while lifting headline HICP by 0.05-0.15% over the subsequent year. n To size the joint impact of the current heatwave and wildfire episode in Europe, we combine the two channels in a jointly estimated model. Linear scaling of the current shock suggests a notable GDP drag and inflation boost, especially in France. Accounting for the likely concavity of the impact function, we estimate a potential drag of about -0.2% to -0.4% of GDP over the next 12 months across countries, and a boost of 0.3%-0.5% to consumer prices. n Our model estimates, however, are not statistically significant, with the confidence bands straddling zero at most horizons. We therefore use bottom-up descriptive estimates as a cross-check, accounting for the direct GDP and land exposure to the disruptions. These point to much more muted estimates for a GDP hit of up to -0.1% and a boost to consumer prices of 0.1%-0.3%. n Taken together, our analysis points to a modest drag on growth and a manageable boost to inflation from the heatwaves and wildfires. That said, our modelling implies large uncertainties and risks of bigger effects, especially if the

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Goldman Sachs European Economics Analyst

wildfires intensify. We will therefore closely monitor the evolution of the extreme weather and incoming data to gauge the risks to the Euro area outlook.