Drought Impact on Europe 'Limited', but Inflation Risks Rise

The European economy is expected to face only a moderate impact from the drought and extreme heat of the summer, according to AllianzGI's projections. The company estimates that German GDP will be affected by around 0.1-0.4% in the third quarter.

This estimate is slightly lower than that of the Kiel Institute, which puts the impact at between 0.1% and 0.2%, equivalent to €1,000-€2,000 million. AllianzGI's chief economist, Christian Schulz, and head of Stewardship, Antje Stobbe, believe that companies have strengthened their resilience since the crises of 2018 and 2022.

However, they warned that the consequences on inflation could be more decisive for the European Central Bank's (ECB) monetary policy strategy. They noted that periods of drought tend to push up food and energy prices on the continent, particularly in the energy sector where costs are explained by lower nuclear and hydroelectric production.