Money has never been cheaper. Governments and central banks have acted quickly to make it both plentiful and accessible to support companies through the pandemic downturn. The cure, however, has a sting in its tail. As policymakers begin to unwind job retention schemes and other support measures the concern is that economic recovery will be held back by a proliferation of debt-laden companies shuffling across a corporate twilight zone: a whole generation of zombies.
This is no new phenomenon. Even before the Covid-19 crisis, a decade of low interest rates helped to fuel a rise in the number of “living dead”: companies unable to cover their debt-servicing costs from profits in the long term. Leverage in the corporate sector has increased significantly since 2008. Deutsche Bank Securities estimates the zombies’ share of US companies alone has roughly tripled since the financial crisis to more than 18 per cent.
The pandemic has created new ones. There are also fears of a proliferation of unviable “zombie jobs”, kept on life support through furlough schemes. People working in sectors struggling under strict social-distancing rules, such as hospitality and retail, are especially vulnerable. The swelling numbers pose challenges for governments as they grapple with how to stimulate economic activity after the lockdowns.
Allowing zombie companies to limp along, unable to invest or repay their debts, comes at a cost to the wider economy. Research has shown these companies are a drag on productivity growth. They can also hinder the reallocation of labour and skills to more productive ones. Not every zombie company or job can be saved. But these are not normal times. Policymakers must find ways to deal with the mountain of debt, encourage investment in productive new companies, and put in place incentives to create jobs.
In the UK, the government is considering a temporary cut in value added tax to boost confidence. While this could bring a short-term consumption increase, there is no guarantee Britons, fearful for jobs, will be in a mood to spend. The government should consider other tools first. Cutting the “tax wedge” on labour, by reducing national insurance for example, would make a bigger difference and encourage more companies to hire. Allowing businesses to deduct all investments from taxable income straight away would also help spur much-needed investment.
The UK government is also considering bailing out companies deemed strategically important to the economy under bespoke loan or debt-for-equity arrangements, and was poised on Wednesday to agree a rescue deal for Britain’s largest steelmaker, Tata Steel.
There is no reason to fear all zombies. If a company is just able to cover its variable costs and it does not need to invest right now, then its existence can be of some benefit as it contributes to employment. As wages rise, it is likely that such companies will fail, but there is no benefit in exacerbating the current unemployment crisis by forcing them all out of business at once.
Keeping some of these companies alive, even if on life support, would also enable vital retraining programmes to work more effectively; on-the-job training has proven more successful than reskilling redundant workers. Retraining schemes will also be critical in helping those workers stuck in zombie jobs to find new roles, as will job guarantees for young workers.
The pandemic has already inflicted extraordinary damage. Policymakers need to deploy a range of strategies to ensure today’s corporate liquidity crisis does not evolve into an insolvency crisis that engulfs the wider economy.