Anthony Hilton: Surrounded by zombies, but destroying them still won't change anything
There have been fewer company failures in this time of low growth than in the boom
Saturday 17 November 2012
The Turnaround Management Association is in the rescue business. Companies get into difficulty and the TMA people go in with money and expertise to see what, if anything, can be salvaged from the mess. Some parts of the business might get sold or closed but others get saved. The idea is that they preserve what is potentially good and competitive, put their weight behind it and grow a new business out of the old.
Now you would think with all the doom and gloom around that they would have work coming out of their ears, but not a bit of it. In fact the mood at their conference on Thursday was downbeat. And the reason is that for all the talk of recession, there have been significantly fewer company failures in this downturn than in slowdowns in the 1990s or the 1980s. Indeed there have been fewer in this period of low growth than there were when the economy was booming.
The reason is troubled banks and low interest rates. The banks are unpopular enough as it is without creating more political flak by being seen to be pulling the plug on struggling businesses, so they give them the benefit of the doubt for as long as they can. Second, because rates are so low, even heavily indebted businesses can keep up the interest payments for much longer than they could in previous recessions.
Now the good part of this is that it means companies have much longer to sort themselves out and people can hold on to their jobs. The bad side as Governor of the Bank of England Mervyn King, pictured, said on Wednesday at his press conference on the quarterly inflation report, is that we have a lot of zombie companies which are just about alive but never going to do anything meaningful, and we would all be better off if the resources tied up in these zombies could be recycled into businesses with much better prospects. Capitalism requires periods of creative destruction where the old gets swept away to make room for the new and because of low interest rates it is not happening.
It is an argument which always looks better in the economic textbooks than in the real world. There may well be companies which have no long-term hope of survival. But I can't buy the idea that their continued existence is leaving potential new businesses starved of resources, be it labour, capital, premises or bank finance. If the economy was booming it might be a different story but in current conditions it does not sound likely.
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