Extreme heat and persistent drought are imposing mounting economic costs across Europe and the UK, with agriculture, energy generation, transport and labor productivity all coming under pressure as temperatures remain elevated and water supplies decline.

Heat leaves UK agriculture facing major losses

The UK has experienced an unusually dry year, beginning with exceptionally low rainfall in April before successive heat waves struck in May, June and July. The Environment Agency identified July as the driest period on record, while severe drought measures were introduced across half of England and the whole of Wales.

The agricultural sector has been particularly exposed. The Energy and Climate Intelligence Unit (ECIU) estimates that the 2026 harvest could become the weakest ever recorded in the UK. Reduced soil moisture has affected crops including wheat, spring barley and oats, with combined production potentially falling by about 2.5 million metric tons. The resulting losses for British farmers could reach £390 million ($526.5 million), while weaker vegetable supplies could put additional pressure on food prices.

EU economy faces billions in climate-related losses

The economic consequences extend far beyond farming. Dutch bank Triodos estimates that the combined effects of drought and extreme heat could cut EU GDP by roughly 1%, equivalent to about €180 billion ($207.6 billion). Such a decline would effectively erase the bloc’s previously expected economic growth for 2026.

Labor productivity is expected to account for a significant share of the damage, with heat-related reductions in workers’ output alone potentially costing the EU around 0.6% of its economy. Agriculture and food production, energy, logistics and transport are also facing substantial disruption.

Western Europe recorded an average temperature of 21.62 degrees Celsius in June and July, the highest level recorded for those months, according to the EU’s Copernicus Climate Change Service. Continued heat has dried the soil, while reduced moisture can further reinforce high temperatures, creating a cycle that makes recovery more difficult.

Low rivers disrupt Europe’s industrial supply chains

Europe’s major waterways are also bearing the effects of prolonged drought. Falling levels on the Rhine, a crucial commercial route linking industrial centers, are limiting the amount of cargo vessels can carry. Water levels at Kaub in Germany are expected to fall into single digits, raising concerns over the movement of freight, passenger vessels and cruise ships along affected sections.

Lower cargo capacity means ships need additional journeys to move the same quantity of goods, increasing transportation costs for industrial materials such as chemicals, steel, coal and petroleum products. A comparable Rhine water crisis in 2018 contributed to a 0.3 percentage-point reduction in Germany’s economic growth over two quarters, according to ING.

The Danube basin is experiencing similar difficulties. Water levels in Budapest have fallen to just 10 centimeters, well below the previous low of 33 centimeters recorded in 2018. The reduced flow is affecting both shipping and power generation across Central and Eastern Europe.

Drought puts European power generation under pressure

Low water availability has also disrupted nuclear and hydropower production. Hungary’s Paks nuclear plant, which normally produces around 2,000 megawatts, has seen output fall as low as 240 megawatts. In Romania, one unit at the Cernavoda nuclear facility was shut down after Danube flows dropped below one-third of normal, while the second unit continued at reduced capacity.

Serbia’s largest hydroelectric facility has likewise been operating at about one-fifth of its usual capacity. At the same time, electricity demand has climbed as households and businesses rely more heavily on air conditioning and cooling systems, contributing to prices rising above typical levels in several European markets.

France expands water restrictions amid drought

France, Europe’s largest agricultural producer, is facing increasingly widespread water shortages. Authorities have introduced monitoring measures and restrictions across 99 administrative areas, with conditions classified as critical in about 67 of them.

The restrictions affect irrigation, industrial operations and household water consumption, underscoring the broader economic impact of the drought. France’s economic growth could lose as much as 1.4 percentage points as a result of extreme heat, adding to concerns over the wider economic consequences of Europe’s increasingly severe weather conditions.