Heatwave puts growing pressure on Europe’s economy

Europe’s heatwave is increasing pressure on food prices, supply chains and the economies of countries already carrying heavy debt, ERR reports, citing several media outlets. The costs of treating heat-related health problems are also adding to the burden on societies, while Reuters has identified extreme heat as an increasingly important macroeconomic factor for investors.

Supply chains come under pressure

Investors have so far focused on the Strait of Hormuz and other trade routes disrupted by the war involving Iran, which has pushed up fuel prices. Europe is also facing disruptions of its own, however, as water levels on major inland waterways, including the Rhine and Danube rivers, have fallen to exceptionally low levels.

According to ING, around 285 million tonnes of goods are transported along the Rhine each year. About 80 percent of all goods carried on Germany’s inland waterways travel along the Rhine, which connects the country’s key industrial regions.

Some freight services have been suspended, while others are operating with reduced loads, driving up transport costs. Andrzej Szczepaniak, a senior economist at Nomura, told Reuters that he checks the water level at Kaub, a Rhine gauge station, every day. The location is one of the river’s shallowest stretches.

Politico reported on Friday that low water levels on the Danube are also preventing Hungary and Romania from operating their nuclear power plants at full capacity. This is reducing electricity generation and forcing restrictions on the normal activities of residents and businesses.

Heat threatens to fuel inflation

Supply chain disruptions could add to inflationary pressure. Heatwaves, drought and wildfires are also affecting agriculture across Europe, raising concerns about the availability and cost of food.

“We will certainly see food price inflation,” said Paul Jackson, global market strategist at investment firm Invesco. He also pointed to the El Niño weather phenomenon, which is expected to accelerate the global rise in food prices further.

Major supermarket chains in the United Kingdom have already warned that a new wave of food price increases may be ahead.

If energy prices rise again, central banks will face a difficult choice, Jackson said.

Economic growth slows

The situation is creating a dilemma for central banks. They must fight inflation, while heat may slow economic growth that monetary policy would otherwise seek to stimulate.

Markets are currently pricing in at least one additional European Central Bank interest-rate increase before the end of the year.

A recent study by the University of Mannheim and the European Central Bank found that last summer’s heatwaves, droughts and floods reduced European economic output by 0.3 percent. Cumulative losses could reach 0.8 percent of gross domestic product by 2029.

Persistently low water levels could further reduce industrial output and slow economic growth.

Nomura economist Szczepaniak said the situation on the Rhine was already worrying, although it had not yet reached the point of having a direct impact on Germany’s gross domestic product. Weather forecasts indicating that drought would continue in Germany were also a concern, he added.