Rising Temperatures Threaten Global Productivity and Economic Growth

Preliminary calculations suggest that ongoing heat waves in Southern and Central Europe, the United States, and China could be associated with significant economic costs.

Estimated GDP losses range from -0.1 percentage points in Germany to as much as -1.4 percentage points in Spain, with total losses amounting to -0.5 percentage points in Europe, -0.6 percentage points in the US, and -1.0 percentage point in China. For comparison, one day of extreme heat (above 32°C) corresponds to half a day of strikes.

How to counteract? Adaptation is key. In the short term, warning and preventive measures can be introduced. However, these must be supplemented with long-term structural adaptive measures to prepare cities for climate change (e.g., greening cities, light-colored or vegetated roofs) and ways to productively adjust workplaces to increased heat stress (i.e., adaptation of buildings, infrastructure, and working hours).

Turning up the Heat

Heat waves sweeping across Central and Western Europe and the United States are causing temperatures to rise well above seasonal norms. Record-high temperatures are making headlines across the Northern Hemisphere, highlighting the physical risks of climate change and questioning our economic resilience to extreme heat. Figure 1 shows daily air temperatures measured at 2 meters above ground via satellite data and computer simulations to capture global real-time temperatures. According to the Copernicus Climate Change Service/ECMWF, 2024 was the warmest year on record, and May 2025 was the second warmest May globally. Forecast models predict a large and persistent heat dome will cover Western and Central Europe and the US in late July, driving temperatures even higher.

Climate change increases the frequency and intensity of extreme heat, making heatwaves, droughts, and wildfires the “new normal” with far-reaching economic consequences. Such events, according to Allianz Trade, have significant direct negative impacts not only on humans and wildlife but also on the economy, causing high material losses in developed countries and “pre-heart attack” states in developing countries.

Net macroeconomic losses (i.e., indirect) are generally negative but are unlikely to be severely painful for large developed economies, as they can cope well with negative production shocks (e.g., by compensating lost production during heatwaves with increased output elsewhere). Moreover, while destroyed capital assets affect GDP only slightly and mostly in the long term,[1] (mainly debt-financed) relief measures appear immediately in GDP measurements. Statistical analyses also reveal the phenomenon of “productive destruction”: the impression that natural disasters temporarily have a positive impact on economic growth (similar to, for example, last year’s floods).

Economic indirect effects tend to be more severe for low-income countries with smaller, less diversified economies, even though international disaster aid and development assistance may temporarily increase cash transfers.

However, the relationship between GDP growth and natural disasters is highly nonlinear with respect to disaster intensity. For instance, a disaster in the top 1% of the disaster index distribution may reduce GDP growth by 7%, while a disaster in the top 5% reduces it by only 0.5%.[2] The impact of tipping points has so far been ignored in IPCC-based damage forecasts due to lack of scientific consensus on quantitatively defining these effects.

Figure 1: Global Daily Air Temperature (°C) at 2 meters above ground

Sources: Climatereanalyzer.org, Climate Change Institute, University of Maine

Extreme temperatures also reduce labor productivity. The International Labour Organization (ILO) forecasts that heat stress will reduce total potential working time worldwide by -2.2% (equivalent to 80 million full-time jobs).[3] According to the 2022 Lancet Countdown report, 470 billion potential working hours were lost in 2021 — 37% more than the 1990-99 annual average and an average of 139 lost hours per worker.[4] Negative effects are more visible in developing countries where lower-income workers are often more exposed to heatwaves (e.g., in Africa and South Asia, given housing and workplace quality and limited access to air conditioning). A key factor in productivity loss is the number of extreme heat days (typically defined as days over 90°F/32°C). Foster, Smallcombe, Hodder et al.[5] find that physical work capacity drops by about -40% at 90°F/32°C, and at 100°F/38°C, productivity drops dramatically by two-thirds. Using US wealth data, Behrer, Park, Wagner et al.[6] claim that higher temperatures can reduce work output, working hours, and earnings — one additional day above 32°C (90°F) lowers annual wages by -0.04%, or 2.1% of average weekly earnings.

Lower heat impacts are found in wealthier regions. These effects arise from a combination of reduced labor supply, labor productivity, and labor demand, plus increased firm costs. Estimates incorporating annual temperature fluctuations also factor in within-year adaptations such as inter-period work substitution, where workers and firms compensate for lost productivity on hot days by catching up in cooler periods. Attempts to quantify cold temperature effects on payrolls show no significant impact. An ECB paper on extreme temperatures notes partial recovery (rebound) in industry and services, while losses in agriculture and some infrastructure-related jobs tend to persist. Estimated recovery ranges from +0.05pp to +0.15pp, offsetting about 30-50% of the initial impact.[7] This aligns with a recent Dong et al. (2025) article noting weather shocks have transient effects on output.[8]

Allianz Trade estimates China, Spain, Italy, and Greece may see GDP declines nearing one percentage point due to the current heat wave. The US and Romania may experience drops around -0.6 percentage points, France up to a third of a percentage point, while Germany’s impact appears minimal at only -0.1 percentage point. Based on enterprise and labor supply elasticities discussed in the above scientific articles, we calculated the consequences of recent heat waves.[9] Generally, weighted by global GDP, the heat wave translates into a -0.5 percentage point reduction in European GDP growth in 2025 and about -0.6 percentage point worldwide, highlighting rising physical climate risk burdens.

Table 1: GDP Loss Due to Number of Hot Days Above 32°C (May 1 – July 14)

Sources: Visual Crossing, Behrer et al. (2021), Allianz Research. Notes: Includes forecasted temperatures from June 30 to July 14, 2025.

Adaptation Is Key

Working conditions for employees depend on social decisions, suggesting productivity losses due to heat can be mitigated. Individuals, businesses, and governments can apply various approaches including technological, infrastructural, regulatory, and behavioral changes. Although effectiveness depends on local context, many are cost-effective. Promising strategies include optimized work schedules, early morning or evening work shifts, and passive cooling methods. Climate-conscious urban planning and building design modifications best handle elevated baseline temperatures, while air conditioning can address short-term spikes, assuming affordable, reliable, and clean electricity. Arriazu-Ramos et al.[10] show that residential buildings most vulnerable to overheating are those with windows only on one side preventing cross-ventilation and those on top floors. Upgrading building envelopes to current energy standards can reduce indoor overheating hours by an average of -8.6%, with reductions up to -15.3% in the most vulnerable building types.

Furthermore, green roof systems can improve thermal comfort by lowering indoor temperatures by up to -0.5°C compared to standard roof renovations without vegetation cover. Popular studies on climate impacts on productivity tend to present a distorted picture by ignoring adaptation potential and the fact that work productivity may increase in winter months, offsetting summer losses. This is reflected in methodology used in a report on economic and social consequences of extreme heat in the US,[11] which estimates annual losses in recent years at USD 100 billion.

While that report assumes potential economic impact of extreme summer heat will double by 2030, reaching an estimated loss of -0.5% of projected GDP, breakthrough work by Heal and Park[12] suggests a net effect in a particularly warm year in the US of GDP growth by +0.5%. The study we used for our calculations (Behrer, Park, Wagner et al.) also partially accounts for adaptation, as mentioned above.

References:

[1] Estimated infrastructure losses from the 2021 Ahrtal flood in Germany at 0.1% of GDP, and the cost of 2025 Los Angeles wildfires around USD 4.6 billion causing a 0.5% drop in state GDP in 2025.

[2] Felbermayr, G. and Gröschl, J. (2014), “Naturally negative: The growth effects of natural disasters,” Journal of Development Economics, 111: 92-106.

[3] ILO (2019), Working on a WARMER planet – The impact of heat stress on labour productivity and decent work, https://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_711919.pdf.

[4] Lancet Countdown (2022), Health and climate change: health at the mercy of fossil fuels, doi.org/10.1016/S0140-6736(22)01540-9.

[5] Foster, J., Smallcombe, J.W., Hodder, S. et al. (2021), An advanced empirical model for quantifying the impact of heat and climate change on human physical work capacity, Int J Biometeorol, 65, 1215-1229.

[6] Behrer, A. P., Park, R. J., Wagner, G., Golja, C. M., Keith, D. W. (2021), Heat has greater impact on work in poorer areas, Environmental Research Communications, 3(9), 095001.

[7] Faccia, D., Parker, M., Stracca, L. (2021), Feeling the heat: extreme temperatures and price stability, ECP Working Paper Series 2626.

[8] Dong, J., Tol, R., Wang, J. (2025), The impact of climate and weather on economic outcomes: Evidence from Global Subnational Data.

[9] Key assumptions for first-order estimate: incomplete temperature data, use of daily national averages, elasticity calibrations from US county data, no accounting for agricultural productivity impacts.

[10] In the face of climate change in a temperate European city: Diagnosing urban overheating and adaptation strategies for residential buildings.

[11] Atlantic Council (2021), Extreme Heat – the Economic and Social Consequences for the United States, www.atlanticcouncil.org/wp-content/uploads/2021/08/Extreme-Heat-Report-2021.pdf.

[12] Heal, G. & Park, J. (2014), Feeling the Heat: Temperature, Physiology & the Wealth of Nations, NBER WP 19725.

Source: Allianz Trade

Original Polish article: https://ceo.com.pl/wplyw-upalow-na-gospodarke-fala-goraca-moze-kosztowac-europe-05pp-pkb-67245

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