No plague of zombie companies but some companies are dying
STACY SQUIRES / STUFF / Stuff
About 73,000 businesses have closed in the past year, up from 65,000 before the pandemic.
NOTICE: You may have heard of the threat of a plague of Covid-19 zombie businesses, limping and only staying in business due to government support and extremely low interest rates.
But while there may be a few in some hard-hit sectors and regions, the problem is not widespread.
Specter of zombie companies
Japan is perhaps infamous for its zombie problem. At its peak in 1998, An estimated 15% of Japanese listed companies are zombies. Excessive debt and excessively high asset prices were followed by an economic collapse for a decade.
Interest rates have been kept artificially low to avoid toppling over-leveraged firms, leading to zombie firms too big to fail, but too much in debt to invest and innovate. They sucked up money and resources that could have been better spent in more exciting and dynamic businesses.
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Current low interest rates and money printing have made it very easy for some companies to borrow and hedge underlying issues. Deutsche Bank estimated that around 20% of publicly traded US companies were zombies in 2020.
More and more companies are closing
Instead of zombification, we are seeing the death of companies in recession. About 73,000 businesses have closed in the past year, up from 65,000 before the pandemic. The increase is similar to the last recession, but there are fewer troubled closings. For example, bankruptcies last year fell by a third, while they increased by 50% in the last recession.
It seems weak companies are dying, but not in the same disruptive and painful way as previous economic shocks.
When the pandemic hit, the wage subsidy program was widely and generously rolled out. At its peak, almost two-thirds of New Zealand’s 2.7 million workers were mostly beneficiaries.
The program has been very successful. This prevented business closings and job losses during the closures and activity rebounded quickly when the restrictions were lifted.
Companies could also borrow on easy terms and were allowed to negotiate in the event of insolvency. It helped them wait for the blockages to end.
Activity has returned to normal for most industries. For them, the wage subsidy was the ideal solution.
For some companies, everything has changed. The border closure has had the biggest impact on tourism (everything from airlines and travel agents to hotels, restaurants and tour operators).
The most economical pain is concentrated in Queenstown, Central Otago, Kaikoura, Marlborough and Rotorua, where stronger domestic tourism has not been enough.
There could be even more business closures to come, as international tourism may not return to “normal” for many years. The gradual departure of international students will also have an impact on the education sector.
Extremely low interest rates also helped businesses that had borrowed heavily. But too much business borrowing is not a common problem in New Zealand. Most of our extreme debt is residential mortgages.
Supports the unwinding
As the pandemic business support mechanisms unfold, some weak and vulnerable businesses will close.
There is no longer an easy lifeline for credit. SMEs didn’t want to borrow during the initial Covid disruption when easy credit was made available, but they are struggling to borrow now that they want to.
Hinges on the economy and work
Although the economy is growing at a moderate pace, there are risks.
The resurgence of cases and restrictions could affect our exports and imports. Uneven global vaccine deployment means a high likelihood of more variants and the persistence of the pandemic. We cannot bet on a return to normalcy soon.
A decline in net migration could limit the economic recovery, as skills shortages are felt. There are over 30,000 vacant positions. The previous peak was 25,000 when we had a net migration of almost 70,000 people per year on average. Higher wages will help the best employers, to the detriment of weaker companies. Business closures because of this will take place slowly over time.
There are always risks in business. But the pandemic has not led to corporate zombification. Instead, we’ve seen an increase in business deaths and it’s not over yet.