Brussels, Belgium. Extreme heat waves and droughts are increasingly threatening economic growth across the European Union, with the agricultural sector in regions such as Cyprus facing substantial risks from compounding climate shocks, according to a new study published by the European Central Bank.
The research examined 1,117 regions between 2002 and 2022 and used climate-augmented models to assess how extreme weather events affect gross value added per capita across economic sectors.
Compounding climate events rise across regions
The study found that coinciding heat waves and droughts were most frequent in Mediterranean countries, specifically Italy, Spain, Cyprus and Malta, as well as parts of central and eastern Europe. It said the frequency of these compounding events has risen notably in recent years.
Machine learning improves predictions
The authors, Sarah Spiteri, Léonore Lebouteiller, Nicole Vorderobermeier, Mar Delgado-Téllez and Andrej Ceglar, said machine learning methods substantially improved the accuracy of economic predictions by capturing complex climate-economic interactions that traditional linear models often miss.
Agriculture faces strongest impact
The most pronounced negative effects were identified in the agricultural sector. Simulations of extreme climate scenarios suggest annual growth could fall by between 1.9 and 7.6 percentage points in most regions.
The study said the industrial sector is less affected by these climate extremes, while manufacturing remains broadly stable, likely because indoor production environments buffer against heat and drought.
Policy relevance of climate data
The findings highlight the importance of integrating climate information into short-term economic monitoring tools, according to the paper.
“Climate-augmented predictions using machine learning methods can support the identification of sectors and regions most exposed to compounding climate extremes, to support policymaking and guide the design of targeted and effective adaptation strategies,” the authors stated.
The study said linear models struggle to represent the economic effects of climate extremes, while nonlinear channels play a critical role in how these shocks spread through the economy. It added that droughts and heat waves have increasingly interacted and cascaded across sectors, amplifying socio-economic impacts across the continent.