This year's heat waves and the associated declines in productivity and agricultural output could erase as much as 1% of the European Union's gross domestic product, effectively wiping out most of the bloc's expected economic growth for 2026, according to Dutch bank Triodos.

Triodos, a bank and wealth manager focused on financing environmentally and socially sustainable projects, expects labor productivity losses driven by extreme heat to reduce EU GDP by approximately 0.6% this year. Agricultural output alone is projected to fall between 3% and 7% as a result of the repeated heat waves, the bank said in a report carried by Reuters.

Europe has experienced repeated extreme heat summers over the past two decades, with events in 2003, 2022, and 2023 each causing tens of thousands of excess deaths and significant infrastructure strain. What distinguishes this year is the compounding effect of heat on an economy already weakened by the energy disruption triggered by the war in Iran, which pushed up fuel costs and reshaped trade flows through the Strait of Hormuz.

The broader macroeconomic backdrop has also deteriorated. After reaching 1.5% growth in 2025, EU GDP growth is projected to slow to 1.1% in 2026, according to the European Commission's spring 2026 economic forecast, released nearly three months after the war in Iran disrupted oil and gas flows through the Strait of Hormuz. The Commission revised its GDP growth estimate down by 0.3 percentage points due to the new energy shock and expects inflation to climb to 3.1%, an upward revision of a full percentage point compared with its Autumn 2025 Forecast.

"Higher food prices, constrained power generation and higher electricity prices, and disruption to roads, rail and inland waterways add to the damage," Triodos analysts wrote in their report.

France, the EU's second-largest economy behind Germany, is expected to be the hardest hit in terms of GDP and labor productivity losses. According to the bank, French GDP could decline by approximately 1.4% as a result of multiple extreme heat waves this summer, potentially pushing the economy into a contraction of as much as 0.6%.

France derives roughly two-thirds of its electricity from nuclear power, making it especially vulnerable when high temperatures and drought reduce the availability of river water used to cool reactors. France has already been forced to curtail nuclear power generation this summer due to low water levels on the rivers used to cool reactors.

The energy supply disruptions have extended across central and eastern Europe, where extreme heat and drought are straining the continent's broader energy system. The conditions have reduced refinery efficiency, forced cuts to nuclear and hydropower generation, and pushed diesel refining margins toward 20-year highs.

The convergence of slowing growth and rising inflation poses a dilemma for the European Central Bank, which had been easing rates earlier in the year as energy prices cooled. If heat-driven agricultural and energy costs persist into autumn, they could complicate the bank's policy path and prolong pressure on household purchasing power across the bloc.

By Michael Kern for Oilprice.com