We're all Zombies now

In the US failing businesses are typically let go by their owners and Banks. In the UK, where there is a stigma attached to bankruptcy, we hang on enduring a slow and painful death. The expression Zombie company comes from this state of limbo and this problem has got a number of economist excited. 

As we await the arrival of the new Governor for the Bank of England and perhaps a change in Monetary policy maybe we should consider a fiscal squeeze to kill off these Zombie - to use a gardening metaphor - prune now to create green shoots in the spring.  As the Telegraph tell us

One option is to tighten monetary policy by raising interest rates and putting QE into reverse. This is based on the Hayekian idea that the slow recovery is down to there being too many zombie companies being kept going by current monetary ease, which is blocking up the usual channels by which an economy heals and renews itself. Supposedly, what we need is a bout of creative destruction

http://www.telegraph.co.uk/finance/comment/rogerbootle/9814360/GDP-for-Q4-Be-prepared-to-get-that-sinking-feeling-on-Friday.html


The theory goes something like this: badly capitalised and poorly performing businesses are being propped up by the banks that don't want right down on their balance sheet.  This cautiousness also makes the banks less willing to offer growing business the cash they need.  The we are stuck in a vicious circle of low investment and low growth. To break this cycle the government could do more.  One idea is to use the quantitative easing to by up these distressed assets this would put money in to the real economy and get these Zombies off our back.

Bank of England data from Nov 2012 tells us that 3 in 10 companies were loss making in 2010 -11, but companies falling into administration has hardly risen.  These dead businesses are tying up capital and resources that more dynamic business would love to get their hands on.  Also this log-jam has slowed the rate of company births and also reduced the overall productivity of the economy. 

This is a massive drag on our economy as the chart below shows:  if we believe that 30% of our businesses are Zombies the scale of the problem is enormous.  Being conservative we could expect that the problem is most keenly felt in the smaller company sector.   If so this amounts to 3.8m people working in unproductive companies or 16% of the workforce.

1-100 employees	Businesses		Employment		Employees
All business in UK	4,777,455		12,571,700		8,582,500
30% Zombies	1,433,237		3,771,510		2,574,750

Company owners need to be encouraged to wind things up rather than limp along, unable to shed staff due to the cost of redundancy but without the work required to keep their workforce busy.  Over to you George O