The Regional Economic Impact of Weather Shocks: Evidence from Portugal

Weather extremes play an important role in shaping short-run economic activity, yet the literature offers little evidence on how weather shocks translate into household spending. This study examines the short-term economic impacts of temperature, wildfire risk, and a novel measure of rainfall volatility on point-of sales purchases, unemployment, and housing prices using a panel of Portuguese municipalities from 2010 to 2021. A panel vector autoregressive model with exogenous variables including cross-border spillovers from similar climate regimes using climate factors as controls is used. Panel local projections show that a one-standard-deviation increase in hourly rainfall volatility raises purchases and house-price growth, and lowers unemployment. Increases in mean temperature boost spending, whereas temperature variability dampens it, and wildfire risk reduces consumption. Introducing disposable income, non-linear terms, longer lags, or event-count weather indicators leaves these elasticities virtually unchanged. Regional analyses reveal that responses in the Lisbon Metropolitan Area and Algarve (southern Portugal) are not only larger but sometimes opposite in direction compared to those in northern Portugal. To the best of our knowledge, the findings provide the first evidence of weather-induced fluctuations in purchases within an European setting, offering guidance for adaptation policies and risk management.