News Column

British recovery slowed by horde of zombie firms

June 16, 2014

TIM WALLACE



ZOMBIE firms kept alive by ultra-low interest rates are the biggest drag on productivity in the UK economy, the Bank of England said in a report today.


Weak firms have not gone bust because they are helped with low interest rates and have been given room to delay tax payments. As a result there is less room for more productive firms to expand or to be established.


The wider economy can suffer because resources like banks' capital and the firms' staff are not re-allocated to more productive uses.


By the end of last year output per worker was 12 percentage points below where is would have been had it continued its pre-crash trend of strong growth, the Bank of England estimates.


Of the gap, up to five percentage points - the biggest factor and almost half of the drag - comes from zombie firms.


"Impaired resource allocation and unusually high firm survival rates," in official terms, is the largest factor.


Another three to four percentage points comes from reduced capital investment. And the rest that has been identified so far comes from reduced demand as the economy slumped.


The Bank's analysts hope the zombie problem may start to fade as the recovery grows as more, better firms can access bank loans.


"Productivity growth could pick up if barriers to the reallocation of labour and capital start to wane, for example due to a reduction in macroeconomic uncertainty or an improvement in credit conditions," the report said.


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Source: City A.M. (UK)


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