Some advanced economies are on the brink of recession. Dear Guests, This is not the first time the world had experienced supply shocks in commodities. But, these shocks were usually in energy prices and consequently, they had affected advanced economies more severely than the developing ones. The rise in food prices, on the other hand, has led to different repercussions. In comparison to the industrialized world, food expenditures in developing countries constitute a larger share in the basket of consumer prices. That is why increases in food prices typically lead to higher increases in the inflation rates of developing countries. Food prices have been rising dramatically, particularly since mid-2007. At one point, the inflation of wheat prices reached triple digits. Similar levels were observed in corn, soybean, and rice prices. According to estimates of the International Monetary Fund, food inflation accounted for 44 percent of global inflation in 2007 – up from 27 percent in 2006. In Asian countries, this figure reaches to 68 percent. Food inflation is expected to contribute almost two thirds of increase in inflation rates in Brazil, Chile and Argentina. Despite some relief in the most recent period, they are expected to stay elevated in the near future. There are both supply and demand pressures behind this dramatic surge in food prices. On the supply side the amount of resources allocated for agricultural production has been stagnant for a while due to rapid urbanization and industrialization.

In the latest ECB staff macroeconomic projections, expected real GDP growth was revised downwards, and the outlook continues to be viewed as tilted to the downside on account of persistent uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets. In my view, the deterioration in the growth outlook increases the risk of financial instability particularly via two main channels. First, low economic growth raises concerns about sovereign debt sustainability. And second, it further dampens profitability prospects for the banking sector. A weaker growth trajectory will challenge euro area sovereigns’ ongoing deleveraging. Low growth and elevated public sector debt also leave a number of euro area countries vulnerable to higher funding costs. Furthermore, threats stemming from rising protectionism around the globe, and high political uncertainty within Europe, may amplify potential corrections of sovereign bond risk premia. These risks notwithstanding, market-based indicators of stress in the euro area sovereign bond markets have remained relatively contained in 2019, and debt sustainability concerns have remained country-specific. Looking ahead, as growth prospects moderate it is imperative that fiscal buffers are rebuilt in countries where government debt still is too high. A prolonged period of low economic growth also poses challenges for euro area banks. Over the past ten years following the great financial crisis, funding strains and subsequently hampered bank intermediation capacity related to low bank profitability have figured prominently in our risk assessments. The low growth and inflation environment will probably exert downward pressure on the risk-free rate component of bonds across maturities.