to may 2006, whereas the hicp increased by 3 per cent. the economy is expected to grow by about 5 per cent this year - a broadly similar rate to that in recent years. with relatively favourable conditions in the global economy, it is hoped that exports will pick up through the course of the year. nevertheless, the main driver of growth is likely to continue to be domestic demand. strong growth in consumer expenditure and investment is forecast on the back of strong employment growth, the maturing of the ssias and rising income levels. the labour market is expected to continue growing, albeit at a slightly reduced pace given the projected moderation in the growth of the construction sector. the unemployment rate is forecast to remain broadly unchanged. there are risks and vulnerabilities in the domestic economy that could affect the relatively good economic outlook. i will now outline some of those risks. • in relation to the housing market, while moderating through much of last year, the recent reacceleration in house price increases, well in excess of the increase in nominal incomes, is a concern and has increased the risk of a sharp correction in the market. for the most part, house price increases over the last decade have been well supported by fundamentals, such as demographics, employment and incomes. however, the recent re - acceleration in house price inflation does not seem to be fully driven by a corresponding upturn in fundamentals. this could suggest that there is a danger some gap may be emerging between actual house prices and the price warranted by the fundamentals. however, given the wide range of measures that different valuation methods tend to show, it is not possible to be precise about this. even if there were some over - valuation in the market, this need not necessarily lead to a sharp correction. it could, for example, ease over time, by a combination of a broad stabilisation of prices and continuing improvements in the fundamentals. this gradual easing over time continues to be our expectation. • borrowing levels have continued to increase strongly. residential mortgage lending has been increasing at annual rates of about 30 per cent in the early part of 2006. the household sector ’ s debt to income ratio is now very high by international standards. • another risk relates to an over reliance on domestic demand. personal consumption expenditure picked up in 2005 after a number of years of quite modest growth, combined with exceptionally strong investment expenditure. there was, however, a much weaker export market performance, which needs to improve. in

exacerbated by it, mean that some smes will be unviable. it would be a mistake to continue with protection and forbearance in perpetuity, just as it would be wrong to allow all companies making losses currently to fail. the complex challenge for all of us involves the timing and identification of the withdrawal of support and normalisation of the functioning of the insolvency criteria. an assessment of viability for firms will ultimately depend on a range of firm and sector specific features and each case will of course be specific to each firm. however, one piece of information that can guide the discussions relates to the performance of smes before the pandemic and our research has highlighted two groups that may struggle. first, 5per cent of smes made a loss in 2019 and were struggling in 2020 ( making a loss or breaking even ), and second, 19 per cent of firms were struggling in 2020 and just breaking even in 2019. all other things equal, such firms may be more vulnerable to liquidation as the pandemic evolves and insolvency criteria begin to normalise. by contrast, a much larger group of smes have been struggling in 2020 but were profitable prepandemic, suggesting that their longer - term survival prospects are stronger and that restructuring and forbearance efforts would be better focused on them. conclusion the past year has been particularly challenging for smes across the country, and how policymakers can support viable firms to recover and thrive as our economy recovers is a key issue. i look forward to hearing your views on how smes can respond to the most pressing challenge of the pandemic, as well as the longer - term issues of digitalisation and climate change. i hope you all enjoy the conference. 2 / 2 bis central bankers'speeches