Worry about the zombie economy, not zombie companies
Are “zombie companies” to blame for the weak recovery?
This idea seems to be on its way to becoming the new orthodoxy. There has been a string of reports recently diagnosing this as an illness. John Moulton is on the case. Insolvency firms are banging the drum. Even the Bank of England has started exploring the question. The Bank published this chart in its latest Inflation Report showing that company liquidations have remained modest, even as the proportion of loss-making enterprises has risen to a third of the total:
The argument is that failing firms are being kept alive by low interest rates and forbearance by banks who don’t want to crystalise losses on their lending books. We’re told that these zombies tie up capital and resources that would be more produtively deployed elsewhere, and this helps to explain the low productivity growth in the UK since the recession.
The implication of this analysis is that the Bank of England should raise interest rates, kill the zombies, and allow profitable firms to fill the gap. Advocates hint that what we need to get growth going is a bit of the Schumpeterian “creative destruction”.
Duncan Weldon outlines some reasons here to be sceptical. As Duncan points out, many of the zombie slayers have a whiff of Andrew Mellon about them, the US Treasury Secretary who felt that mass bankrupticies during the Great Depression would “purge the rottenness out of the system” and enable “enterprising people [to] pick up from less competent people”.
I would add that one might also diagnose the problem not as zombie companies, but as a zombie economy. Demand has one foot in the grave. If spending levels across the economy picked up, one would expect many of those struggling companies to return from the living dead.
Why, though, is demand weak? Many of the liquidationists would argue that it is because companies overborrowed in the boom and are now deleveraging.
But if one scans the UK economy, the leverage of private firms is not what leaps out, as shown in this chart from the McKinsey Global Institute:
The pre-crisis build up in debt was concentrated in the banking sector, rather than companies. If leverage is the dominant problem, this is the area one would address first.
Would-be zombie slayers cite the example of Japan, which failed to get its banks to foreclose on living-dead firms in the wake of its late 1980s bust, delivering two decades of weak growth.
Yet as this chart, also from McKinsey, Japanese private sector debt peaked at a higher proportion of GDP (147%) than the UK (122%).
This isn’t conclusive. One might reasonably argue that company leverage is still too high to be healthy.
But we should be wary about embracing the idea, which many seem to find seductive, that putting struggling firms out of business is the economic tonic Britain needs.Tagged in: bank of england, Schumpeter, zombie companies
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