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Europe’s coming drought: who will be the winners and the losers?

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As we welcome the summer season, families across the globe are enjoying sunny days and outdoor picnics. Yet, for meteorologists, these extended spells of sunshine signal a concerning phenomenon: drought.

This period of below-average rainfall and baking heatwaves present significant challenges, particularly for regions such as Europe and the UK, which are now bracing themselves for a potentially strenuous season ahead. Understanding the full implications of this environmental issue is crucial, as droughts can have far-reaching impacts on a variety of sectors.

To gain a thorough understanding of the ongoing drought situation in the UK and Europe, and its potential implications for different sectors, it’s useful to examine a recent historical event. Just in 2022, these regions experienced severe droughts and record-breaking heatwaves, consequences of the ongoing climate crisis.

European droughts in 2022

In the UK, the situation was critical last year. The country faced its driest summer in half a century, prompting the declaration of official drought statuses in several regions, including parts of London. This drought, compounded by heatwaves and infrastructural issues, led to a rapid decrease in water reserves. As a result, authorities imposed water usage restrictions and set emergency drought plans into motion.

The drought also caused great damage on the agricultural sector, with diminished rainfall leading to lower crop yields. This posed a threat to food supplies and affordability, a situation that experts warned could jeopardise the UK’s food security.

The European continent was also warming at the fastest rate on record, and found itself grappling with extreme heat, diminished rainfall, and rampant wildfires. These conditions resulted in substantial environmental damage and claimed over 16,000 lives due to heat-related illnesses. Countries like Spain, Switzerland, and Italy felt the severity of the situation most acutely, recording their highest temperatures ever.


Drought indicators in 2023

What can we anticipate for the year 2023? The UK is poised to make meteorological history, with June 2023 predicted to be the hottest since records began in 1884. However, the scorching temperatures won’t be confined to June alone. The Met Office forecasts that the heat throughout 2023 will surpass that of 2022, positioning it as one of the warmest years ever recorded.

Such elevated temperatures have the potential to exacerbate the evaporation of water from the ground, leaving the soil increasingly arid. As the ground dries out, the air above can heat up even more, resulting in an accelerated rate of evaporation. This vicious cycle can intensify the severity of the drought, compounding its impacts on both the environment and society.

UK mean temperature chart

The effects of extreme heat aren’t the only factors contributing to worsening drought conditions. The combination of below-average rainfall and reduced river flows adds another layer of complexity to the situation. Notably, the past winter registered unusually low levels of rainfall and snowfall, not just in the UK, but also in France, Ireland, Switzerland, and certain regions of Italy and Germany.

For instance, Carmelo Cammalleri, a researcher in the European Commission, estimates that Italy’s longest river, the Po, recorded water levels that were a staggering 60% below its typical levels in March. Similarly, the Rhine, a significant river originating from the Alps and flowing through multiple countries before reaching the North Sea, was found to be 1 to 2 meters below its usual levels for March.

The UK Hydrological Outlook paints a similar picture. Despite May rainfall being slightly above average in some southern and eastern parts, the month was largely dry for the majority of the UK. Indeed, it received only around half of its average rainfall, with particularly parched conditions in the north and west. The outlook for June 2023 suggests that the trend of below-normal river flows is likely to continue in these areas, with other regions possibly experiencing normal to below-normal flows.

Given the current predictions, investors are advised to brace themselves for a parched summer. The impending drought is poised to have significant economic consequences, and it’s crucial to devise strategic plans to navigate this challenging period effectively. In this climate of uncertainty, informed decision-making could turn adversity into opportunity.

Current drought observations

Europe’s current arid conditions follow the harsh droughts experienced in 2022. The subsequent dry winter means that many aquifers and surface reservoirs have not had the opportunity to recharge. Certain areas of Europe are still grappling with the after-effects of last year’s drought, and the return or persistence of such conditions can magnify the impacts, leading to a cascading effect. The most recent map of the Combined Drought Indicator reveals the gravity of the situation, with 45.4% of the EU-27 territory under ‘Warning’ conditions and an additional 6.9% under ‘Alert’ conditions.

European drought map

Various regions across Europe are being hit hard, with the impact on agriculture being particularly noteworthy. In France, for instance, the agricultural sector has been adversely affected by the lack of rain and scorching temperatures. Italy has also suffered, with rice production being cut due to water shortages, and water levels at Lake Garda and the canals of Venice significantly reduced.

Meanwhile, in Spain, the Fuente de Piedra Lagoon turned into a salt flat due to the heat, and the Sau reservoir in Catalonia dropped to 9% of its total capacity, marking the region’s worst drought in decades.

What implications could this drought have for the UK? Drought warnings have been issued for the summer, with South West Water extending a hosepipe ban to parts of Devon due to the driest conditions experienced in nearly 90 years. The agricultural sector is similarly apprehensive.

Kelly Hewson-Fisher, the National Farmers Union’s water resources specialist, has emphasised the pressing need for the government to prioritise national food production and resilience. The drought’s effects aren’t limited to humans alone. Anglers have reported dry streams throughout the winter and anticipate that fish populations are likely to suffer under these conditions.

Mark Lloyd, the Chief Executive of the Rivers Trust, has also voiced his concerns. He predicts that a second consecutive year of drought could have a “devastating” impact on rivers. He explains that repeated drought conditions can drastically reduce the amount of oxygen in the water, which can harm aquatic wildlife. Additionally, low water levels can exacerbate pollution, concentrating it in smaller volumes of water, thereby increasing its harmful effects on the environment.

Industry impact from the drought

These drought conditions are resulting in significant concerns about rising food prices. The warmer weather and associated drought risks are reducing European agricultural supply, which in turn increases prices faced by consumers. This price increase is further exacerbated by higher costs faced by farmers and retailers due to elevated wage growth and the impact of higher energy costs on agricultural outputs.

Grain products such as bread and cereals, meats, and dairy products are especially vulnerable to these price increases due to supply risks.

The energy crisis in 2022 further compounds the issue, with European farmers facing higher input costs in 2023 due to a surge in fertiliser costs (Russian-Ukraine war). This has led to a shift in crop production, with farmers substituting crops sensitive to fertiliser use such as corn and soft produce towards less sensitive crops such as wheat, thereby aggravating supply concerns and increasing reliance on imports from alternative sources.

Eurozone Food Inflation

Higher agricultural commodity prices are likely to be passed onto consumers in 2023 due to falling margins from food retailers across Europe. These price increases are most likely to affect countries where food consumption necessitates a greater proportion of total consumption, primarily in Eastern Europe.

In forthcoming articles, we plan to delve deeper into the industries that stand to be most affected by this drought, encompassing sectors such as Agriculture, Water Utilities, Energy Production, and Logistics. Our aim is to spotlight specific companies that, despite the challenging conditions, may present intriguing opportunities for investors. By identifying potential winners/losers in this complex scenario, we hope to guide our readers towards informed and profitable decisions.

To keep up to date with our ongoing analysis of this story as it plays out this summer, make sure you are signed up to our daily newsletter. 

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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