Thomas Cook

28th June 2019

Zombie companies continue to suck the productivity out of the UK economy.

Zombie companies are being kept afloat by cheap money according to Plimsoll. Despite its enormity and the chaos it wrought, the ‘Great Recession’ that followed the 2008 financial crash didn’t force as many companies out of business as you would normally expect.

The endless flow of artificially cheap cash since 2008, has allowed inefficient zombie businesses to keep going. When the Bank of England cut interest rates and launched Quantitive Easing, it inadvertently prevented much of the restructuring the UK economy desperately needs.

Unlike other post-recession recoveries, capacity wasn’t freed up. New or innovative companies haven’t been allowed the space to develop newer, more efficient ways of operating. The result has been overcrowded markets that have dampened much of the additional growth more efficient companies might have achieved.

Zombie companies cause all manner of damage. The extra congestion caused by their prolonged survival hampers new entrants and crowds out young businesses. These innovators will be the ones to drive the next generation of productivity. Those young firms that do gain a foothold find it much harder to upscale as they normally would due to market saturation. Many markets are simply full of companies that would have otherwise died.

Plimsoll classifies a Zombie business as one that is over 10 years old with high interest to turnover ratio in each of its last two years. The following is a breakdown of the prevalence of Zombie businesses in each of the UK’s key sectors:

 

Sector

% of Zombie companies

Financial

13

Construction Supplies

14

IT

18

Services

19

Media & Marketing

21

Construction Services

22

Clothing & Textiles

22

Furniture

22

Food

23

Automotive

23

Chemical

23

Engineering

23

Hospitality

23

Agriculture

24

Transport

24

Process Control

24

Energy

24

Printing & Publishing

28

Construction Building

28

Leisure

33

Metals

34

Drinks

34

Electrical & Electronics

35

Healthcare

35

 

Nobody wants to see businesses fail and people lose their jobs. However, keeping these Zombie businesses afloat with cheap money is akin to keeping Blockbuster afloat at the expense of Netflix.

Of course, the Bank of England has hinted at interest rates rising gradually. However, with bubbles in consumer, government and corporate debt plus current Brexit paralysis, it doesn’t seem likely the UK economy will get the medicine it needs to get back to productivity any time soon.

Plimsoll produces individual studies on each of the UK’s 1600 most important markets. To see what we have said about your company, your market and your key competitors, please visit www.plimsoll.co.uk