For Keynesians, the solution to our current economic malaise is the awakening of "animal spirits." The British economist believed that growth didn't just happen because of dull statistical shifts in supply and demand. Instead, sudden outbreaks of human optimism encouraged investment, hiring and spending. Unfortunately, Keynes had not seen many trashy American movies and therefore he failed to reckon with a zombie invasion. According to the Bank of England, shy animal spirits are currently hiding under the bed in fear of the living dead.
Buried in the Bank's Quarterly Inflation Report, which gives chapter and verse on a grim outlook of years of sluggish economic growth to 2015, is a quiet admission that the Bank of England may be partly at fault for Britain's very weak productivity. It seems that low interest rates and quantitative easing (money printing) have allowed weak, heavily indebted businesses to hang on, just managing to keep up with their interest payments but with no spare cash to invest or hire staff and no ability to repay their borrowings.
These are the zombies, companies in a half-life, just ticking over but doing little business. The polite Bank of England doesn't use B-movie language and refers to the practice of "forbearance" by lenders who extend loans and ignore covenant breaches, preferring an interest payment to an insolvency. You might think that was a good thing – better to be sort of alive than bust. However, the Bank points out that forbearance has impeded the reallocation of capital by lenders. The bank cites the Federation of Small Businesses' Voice of Small Business Index to point out that, particularly for small businesses, credit conditions are still tight. Keeping alive one sprawling over-leveraged and inactive housebuilder is not good if it means you have no funds to lend to three smaller new building companies with good projects. You can see the evidence of this in weak levels of company formation.
You can also see the zombie effect in comparisons between the rate of company liquidations, which is currently still well below the heights reached in the recession of the early 1990s, despite a surge in loss-making enterprises.
You can also see it on the U.K.'s high streets – there are boarded up shops but also a profusion of boom-type businesses, such as interior designers and shops that sell candles and cushions, that seem to continue against all the odds.
It seems unkind to wish these businesses to fail, but vacant shops mean that rents will fall. Lower rents will entice new, more profitable businesses that employ more people. We need to find some way of killing the zombies but right now, we are still cowering under the bed.
Carl Mortished