The size of an economy depends on two things: how many people are working and how much they produce. Now that workforces are ageing and shrinking, bolstering productivity significantly becomes crucial. Yet productivity growth in the developed world is unusually poor. There are several theories about this. But recently the spotlight has fallen on the persistence of failing companies, or corporate “zombies”.
In the post-crisis era of historically low interest rates, many companies that in normal economic times would have gone to the wall are struggling on, and this, as Buttonwood notes in The Economist, causes two main problems. The zombies reduce average productivity. They also suck up workers and capital that should go to more efficient operators. “In a sense… the corporate zombies are eating healthy firms.”
A study by Chris Watling of Longview Economics defines zombies as companies at least ten years old (to exclude start-ups borrowing to fund growth) that in the past three successive years haven’t earned enough to cover the interest on their debt. No less than 12% of US firms, by this measure, are zombies, with a sharp jump evident after 2009. Looking at 18 major economies produced a median proportion of zombies of 9%.
The Bank for International Settlements, using very similar criteria to Longview, reckons that the proportion of zombies in six major eurozone economies, including Germany, France and Spain, has risen to 10% from 5.5% in 2007. In Italy and Spain the proportion has tripled in a decade, according to another survey.
And there will be more to come, as John Authers points out in the FT. The number of loss-making firms, who will only stay alive owing to near-zero interest rates, is on the rise. Companies comprising 10% of US market capitalisation are now loss-making.
One key consequence of all these firms on life support is that higher interest rates will finish them off, undermining overall confidence and growth and potentially triggering a debt crisis. But all these zombies also undermine “capitalist creative destruction”, says Authers: the process of clearing out dead wood after recessions, allowing new firms and ideas to thrive.
Zombification implies a decline in long-term growth. This is yet another symptom of the “Faustian bargain” represented by the post-crisis, zero-interest-rate policy. Slashing rates and printing money may have averted a depression, but it created many new problems – ossified corporates foremost among them.
Is German property in a bubble?
Germany’s central bank says it thinks property prices in the biggest 127 cities are, on average overvalued by 15%-30%, taking into consideration the usual fundamentals such as incomes and demographics. Nationwide, prices rose by 5.6% year-on-year in the first three quarters of 2017. Since 2011, prices in seven major cities have jumped by 50%, notes Check24.de.
But this doesn’t add up to a bubble, according to the Bundesbank. Key signs of a bubble are a sharp increase in credit and a fall in lending standards. Neither is visible. Rules governing deposits have barely changed. Mortgage lending, up just 3.7% last year, is growing more slowly than house prices. In fact, it has lagged them ever since 2010.
Structural changes such as greater urbanisation, which creates more demand in areas where strict building regulations squeeze supply, are now key market drivers, says Capital Economics. Record-low interest rates, moreover, mean Germans are now favouring buying over renting. A comparatively small rise in the house-price-to-rents ratio in recent years is another reason not to fear a runaway boom.