The Daily Update: Zombie Companies Warning

The term ‘Zombie Company’ is often used when describing part of what contributed to Japan’s economic stagnation in what is known as the ‘Lost Decade’. Zombie companies survive by only just generating enough cash to pay interest on their debts. After the collapse of the Japanese asset price bubble at the beginning of the 1990’s, Japanese banks continued to support weak or failing firms instead of letting them go bankrupt. Now after years of ultra-low interest rates globally more of these companies around the world are being allowed to stagger on. Many see zombie companies as a barrier to overall productive growth, as the survival of weak companies contribute to lowering the average overall productivity. These companies are detrimental to an economy, as they take up market share and lock up growth that should be available to more successful and dynamic companies.

Mervyn King, the former Bank of England Governor, is the latest to believe that these companies should be allowed to go to the wall to help revitalise parts of the economy here in the UK. Speaking at the Royal Economic Society’s annual conference, Lord King warned ‘It's a problem of reallocation of resources. That requires different sorts of policies and a recognition that we need to allow the zombie companies to disappear and other companies and sectors to expand’. He added ‘Once people recognise that fact then I think we can manage this reallocation, and the prize is going to a period where, if central banks do their job properly, we'll have low inflation, but at a higher growth rate’.

One of the problems is that during this ongoing pandemic, research led by former Bank rate-setter Charles Goodhart has highlighted that many zombie companies have been created by the Government’s pandemic loan support. He believes that the blanket support offered via the Bounce Back Loans Scheme missed a chance to weed out unprofitable companies. This in turn has allowed below par or zombie companies to continue trading even though under normal circumstances they would have gone under.

Of course, letting large numbers of companies go out of business during a pandemic, adding to the unemployment numbers for ideological reasons was never going to happen, however, if the UK or indeed those further afield want to avoid Japan’s mistakes this is an issue that should be at the forefront of policy makers' thinking.