UK’s zombie firms taking a bite out of productivity

THOUSANDS of heavily indebted firms are holding back the UK’s recovery, kept above water by historically low interest rates, according to a new report published today.

According to research by the Adam Smith Institute, a Westminster think tank, 108,000 so-called zombie businesses across the country are only able to service the interest on their debt, preventing them from restructuring.

The authors suggest that the perseverance of such companies goes some distance to explain the UK’s productivity puzzle: despite a considerable increase in hours worked in recent years, output has risen at a much more sluggish pace.

The report shows that corporate insolvencies have now fallen some way below their long-term trend. During the past 25 years, 1.2 per cent of businesses failed annually on average, but despite a weakened economy, the corporate failure rate has dipped to only 0.7 per cent in the past year.

According to Tom Papworth, who authored the report such a situation may delay the UK’s recovery.

“Zombie firms stop workers and money being redeployed to more productive uses, they prevent new, better firms entering the market, they undermine competitiveness, reduce productivity and slow the growth of the whole economy.”

He concluded: “With timely interventions by knowledgeable entrepreneurs, many firms can be restructured and saved.”

The report suggests that capital regulations make banks reluctant to foreclose on debtors and mark down their loss, since it would worsen their balance sheets.

Taking evidence from Japan’s lost decade, the author suggests that continued lending to otherwise insolvent firms can deprive more productive enterprises of resources.

Research by the Institute for Fiscal Studies published in February this year also suggested that capital misallocation could be part of the UK’s productivity problem.