Ed Ballard

Heat waves are underscoring how global warming has become a here-and-now issue for economists.

Temperatures are rising ahead of the July 4 weekend, with 100-degree highs — feeling hotter due to the humidity — forecast for various parts of the central and Eastern U.S. Areas home to more than 150 million people were covered by National Weather Service heat alerts as of midweek.

In Europe, the recent heat wave contributed to 1,300 excess deaths in a week, most of them elderly people, the World Health Organization estimated.

For George Buckley, chief European economist at Japanese bank Nomura, climate change is becoming harder to ignore, even in a profession preoccupied with quarterly data.

"It's no longer something that's going to happen after our generation," he said. He likened it to another slow-burn yet increasingly pressing issue — the economic fallout of an aging population.

Extreme heat depresses economic activity by restricting work and disrupting transport. Economists at Dutch bank ING said canceled events and closed schools "brought back memories of the pandemic lockdowns."

There are beneficiaries. U.K. cinema chain Vue said ticket sales rose by a third year-over-year as families stayed cool in front of the latest "Toy Story." Buckley is considering buying a permanent AC to supplement the portable model he has been trundling between rooms.

"Better air-conditioning units, using more electricity — it's more GDP, " he said. It's too early to say how the most recent heat wave will affect the data, he added.

One academic study pegged the impact of last year's European heat waves and floods at $43 billion, roughly 0.26% of economic output. That doesn't compare with Covid lockdowns, which caused euro-area GDP to shrink by 6.1% in 2020. A closer comparison might be a U.S. government shutdown. Each week of a shutdown reduces annualized GDP growth by about 0.1%, J.P. Morgan estimated last year.

But as heat waves become more frequent, the bill multiplies. It's harder to catch up on a delayed construction project if the next heat wave arrives a month after the last one.

Insurance company Allianz modeled how countries would fare if the five hottest years each experienced between 2014 and 2024 recurred in succession. Some northern economies, including Canada and Scandinavia, would benefit modestly from milder temperatures; more would face big losses. The most exposed, such as France, could see GDP losses of 5% to 7% over five years.

Repairing damaged infrastructure, maintaining stretched emergency services and installing ACs in schools squeezes budgets. The Bank for International Settlements this week listed climate change, alongside aging populations and rising defense spending, as key fiscal challenges for governments.

Extreme weather also stokes inflation, primarily by hitting agricultural production and increasing food prices. One study found that Europe's 2022 heat wave added two-thirds of a percentage point to food-price inflation.

Again, that doesn't compare with the most dramatic economy-shaping events. The Russia-Ukraine war, by disrupting grain and fertilizer trade, raised European food prices by 14% that year.

Sticky heat

The problem is how things pile up. If extreme-weather events keep getting more frequent and severe, they will be harder to "look through," said Buckley — the term for temporary price spikes that don't prompt interest-rate rises from central bankers. By escaping that category, climate change is making it harder to rein in inflation, even if it doesn't appear on the agendas of economic conferences dominated by faster-moving risks like AI.

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Today's email was written by Ed Ballard in London. Contact him at ed.ballard@wsj.com. Contact the team at climate@wsj.com.