The mercury is set to shatter records across the Continent, and the City is already pricing in the fallout. Red heat alerts have been issued across France, Italy and Spain, with temperatures forecast to hit 40C. British travel operators are now scrambling to adjust itineraries, but the real story lies in the broader economic heatwave.
Let’s talk about the immediate impact. TUI and Jet2 shares took a modest hit this morning, down 1.2% and 0.8% respectively. That’s not panic, but it’s a reminder that extreme weather events are no longer a tail risk. They are a recurring cost on the balance sheet. When the mercury rises, so do cancellation rates. And let’s not forget the insurance claims: a spike in holiday cancellations often translates to higher premiums next year. That’s a drag on discretionary spending.
But the deeper concern is what this heatwave signals for inflation. Southern Europe is the breadbasket of the union. We’ve already seen drought conditions in Spain’s olive groves, pushing olive oil prices up 30% year on year. Now add a heatwave that scorches wheat fields and vineyards. The ECB will be watching closely. Higher food prices are a direct hit to consumer spending, and that’s bad news for the eurozone recovery narrative.
For the UK, the risk is capital flight. If investors start to see persistent southern European heatwaves as a structural risk, they may pull money from those markets. That would tighten financial conditions at a time when the eurozone is already fragile. And where does that money go? Typically, to safe havens. But UK gilts are hardly a safe bet with our own inflation stubbornly above target. Perhaps the Swiss franc or US Treasuries. That would further weaken sterling. I’ve been saying for months that the pound is vulnerable to a climate shock. This could be the first domino.
Now, let’s not overreact. One heatwave does not a crisis make. But weather events are becoming more frequent and intense. The market’s job is to price in risk. And right now, the risk premium on European tourism and agriculture should be rising. If it isn’t, that’s a market failure. The travel firms are merely the canary in the coal mine. The real story is how central banks and finance ministers will respond to the new normal of climate volatility.
My advice? Keep an eye on the weather forecast as much as the FTSE. Because in a world where the cost of living is already high, a hot summer can quickly become a cold winter for the economy.
