2 April 2015

The living dead

Last month I took the view that the 2008 loose monetary policy had left a raft of “zombie” companies who would usually have gone bust in a proper recession with higher interest rates.

by John Royden

Head of Research


The definition of a zombie company is one that earns a low or nil return on capital employed or ROCE.  I have read research which purports to illustrate their existence.  Before 2008 the ROCE distribution curve resembled a standard O’Level (or GCSE these days) maths normal distribution curve.  Today’s analysis looks as if somebody has stood on the curve and flattened it.  The conclusion is that there are now many more companies with poor ROCEs. 

These are the zombies - or the living dead.

This could explain the rise in employment with a surprisingly low rise in productivity.  As a zombie company gets a rubbish ROCE, the incentive to invest in capex to meet higher demand is low as it is much easier to just hire another worker.  Productivity per worker remains constant whereas with the automation benefits of investment in a new machine, you get a rise in productivity.  It is more productive to have (a) one worker supervising ten widget machines rather than (b) ten workers bashing out widgets by hand.  Zombie companies operate plan (b)s.

This leads me to the conclusion that wage inflation will probably remain weak.  If you work for a zombie company you can’t ask for wage increases because you know that your employer can’t afford them.  Weak wage inflation will translate into weak Consumer Price Index (CPI) and Retail Price Index (RPI).

It may take a decade of small interest rate rises driving declines in GDP as zombie companies go bust to weed out the ‘feak and weeble’ who should really have been taken out in 2009 and 2010.  But every time that the living dead get put out of their misery, so GDP will look as if it is contracting and politicians will be fearful of having presided over another recession on their watch and they will go soft on interest rates again.

The process of expunging our economy of the low ROCE living dead may take longer than expected.  But we need to do this before we leave ourselves a platform of normal economic conditions from which to launch ourselves.


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