Europe's heat wave could be damaging for the economy

Soaring summer temperatures threaten to drive up inflation and stifle industrial output in Europe in the short term as crops wilt and power plants struggle to keep up with rising demand.

Economists warned yesterday that food prices could climb in the coming months after drought throughout the region ravaged crops, while cooling problems that have caused widespread outages at nuclear power plants could dent industrial output, at least temporarily.

The impact on economic activity is diverse, with absenteeism from work a factor in Britain, livestock dying in Spain, and Europe's key water transport network slowing as river levels fall.

A flash estimate of euro-zone consumer prices, based on data from Germany and Italy, showed inflation eased to 1.9 per cent year-on-year in July from 2 per cent in June. But analysts said the decline would have been bigger were it not for a drought in Italy that pushed up food prices.

With temperatures expected to remain well above 30 degrees until well into next week, electricity demand has surged as citizens from Scandinavia to southern Spain switched on fans and air conditioners to keep cool.

However, nuclear power production, which accounts for more than one-third of Europe's energy output, has been severely dented due to cooling problems caused by falling river levels and rising water temperatures, resulting in power cuts and soaring energy prices.

Consumers could also end up paying dearly for their picnics and barbecues, with bread prices seen climbing as grain crops wilt, while meat prices could also rise as livestock struggle to survive the heat.

Water levels on major inland shipping routes such as Germany's Rhine river have hit dangerously low levels, raising transportation costs because ships are forced to lighten their loads. Increased costs here could also filter through to consumer price inflation.

German retailers' association HDE said the heat was keeping people out of stores and was set to hurt consumer spending just as recent sentiment indicators had pointed to a modest recovery.

In Britain, retail sales shot up nearly 2 per cent in the hottest June in nearly 30 years, as sun-loving Britons stocked up on everything from barbecues to tanning lotions to new clothes.

But as temperatures remained at record levels in August, Britain's crumbling infrastructure has started to wilt. Train speeds have been cut, leaving sweltering commuters fuming and increasing absenteeism already up because of the hot weather.

The cost of food staples such as bread and potatoes could also see a heat premium. British bread prices are seen rising by between 6-8p a loaf after flour millers warned cost rises of around 15 per cent - the largest hike in more than a decade - would have to be passed on.

France has also seen a spike in grain prices and farmers expect the heat to hit the maize crop.