As this chart, produced by the Bank of England shows, we have seen a rise in zombie firms. The bank defines zombie firms as companies which are more than ten years old, and the ratio of earnings, before interest and taxes, to interest expenses is below 1. Or in short, firms that are only surviving because interest rates are so low. And by this definition the share of zombie firms to the total has risen from around 5 per cent in 2007 to 10.5 per cent in 2016. See PRODUCTIVITY PUZZLE SOLVED: CENTRAL BANKS, AGAIN!
The narrative continues, it is zombie firms – that is to say companies that, under normal circumstances would have gone bust, that are propped up by low rates – that are the problem.
According to this argument, record low interest rates are a factor behind the rise of zombie firms, pushing down on productivity, but they are also a factor behind the rise of entrepreneurial activity, which will push up on productivity.
What can we say?
The UK desperately needs high productivity. As the baby boomers retire, the ratio of retired to working people will go through the roof, unless the working population can produce a lot more, it will not be possible to fund the retirement of the baby boomers.
And when rates are slow, investors tend to look towards more risky investments – which is what the UK needs. But others argue low rates has created a debt bubble and supported zombie firms, and only tears can result.
But maybe we just need to give this more entrepreneurial UK more time. It is a new phenomenon, and it does seem as if the entrepreneurial culture in the UK is gaining momentum. But it can take years before the seed of an idea creates something real. Forward wind the clock another five years, the success of entrepreneurial UK won’t only be celebrated in columns and on web sites such as this, it will be celebrated across the media. And by then, the bold, dynamic centres of enterprise will surely be growing faster than the number of zombie firms.
The UK is emerging an entrepreneurial success story – but more needs to be done, and one way to achieve this is to shine the media spotlight on entrepreneurs, their challenges, their failures and of course their successes.
The NatWestGreat British Entrepreneur Awards are currently open for applications, and entrants can apply here.