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One in every five firms in the U.K. is a “zombie,” with profits barely covering debt interest payments, and in some cases not at all, the onservative think tank Onward warned in a new paper.
The research shows that the number of British companies that can be qualified as “zombies” has risen sharply since March, and they now account for 20% of the total number of companies in the UK.
The paper estimates that, without further action, this will have an knock-on effect across the economy, with business investment reduced by some £42 billion a year.
“Slower employment growth that could mean over 400,000 fewer jobs created in a recovery that takes over twice as long, and lower productivity leading to £41 billion of lost growth over 5 years—more than £500 per person,” Angus Groom, the report’s author wrote.
He added that even when demand returns to normal, the financial cost of the downturn could leave a permanent mark on corporatel balance sheets through accumulated debt.
Read:U.K. GDP climbs 6.6% in July, as economy recovers slightly more than half of lost output
On Friday, the Office for National Statistics (ONS) revealed new statistics that show the UK’s gross domestic product grew by 6.6% in July.
Michael Hewson, chief market analyst at CMC Markets UK, said that the reality is that even with all the gradual easing of restrictions since July, it will be difficult to claw back the rest of the lost output quickly while social distancing remains in place. That will continue to act as a handbrake on any recovery.
“This is reflected in the lacklustre rebound in services activity, which improved 6.1% in July, below expectations of 7%,” Hewson said.
Read:U.K. unveils 100% government-backed ‘bounce back loans’ to protect small businesses
As of Aug. 2 1,135,575 and 58,595 loans have been issued under the Bounce Back Loan scheme (BBLS) and the Coronavirus Business Interruption Loan scheme (CBILS) respectively, the report from Onward noted.
Groom said while the government loans schemes have been effective at helping firms through the worst of the crisis, “they represent a double-edged sword in that they have weighed down firms with debt just as we need them to invest to spur the recovery.”
He proposed a scheme—dubbed New Start – whereby the government allows businesses to repay state-backed Covid-19 support loans only when they turn a profit rather than over the next few years when investment and growth are more of a priority than deleveraging.
This would be achieved through a tax surcharge on profits over a long period,
Onward, which used data from the ONS Business Impact of Covid-19 Survey alongside a large sample of firm-level data, found that nearly one in 20 firms (4.3%) is likely to be pushed into technical insolvency due to the levels of debt accumulated since March.
These companies employ an estimated 1.8 million workers.
In July, research by the CityUK Recapitalisation Group and EY, found that three million jobs were at risk and 780,000 small and medium enterprises in danger of insolvency if urgent action isn’t taken to tackle the projected £35bn of unsustainable debt from Covid-19 loans.
