24 Jun 2020
By Stuart Patrick, Glasgow Chamber of Commerce Chief Executive
An old phrase, much used following the 2007/8 financial crash, is back in circulation and I wish it weren’t.
The ‘zombie company’ is deemed to be a business kept afloat with government support and heavily burdened with debt it is unlikely ever to repay. The last decade’s low interest regime, it is frequently said, helped many zombie companies service that debt and it would have been better for the economy if those companies had called it a day and the resources involved re-allocated to more promising investments.
New zombie companies are now, the argument goes, being propped up by the Job Retention Scheme and continuing the JRS is simply an obstacle to the efficient reallocation of resources.
An Economist leader recently acknowledged the challenging task governments face in getting the balance right - withdraw support too readily, and many people will suffer, withdraw it too late and the economy will ossify by ignoring possible changes in people’s habits post lockdown.
Consumers might, the leader said, continue to spend less on restaurants, cinemas and travel - spending more on deliveries, home improvement and video-streaming, with many companies not surviving those changes.
However suggesting those restaurants, cinemas and travel companies are zombie companies is taking the argument too far and thankfully the Economist avoided making that suggestion, acknowledging support should continue for those sectors the government is keeping forcibly closed. No company is a zombie company if it is simply not allowed to operate.
This is the nub of the problem faced by the Scottish Government after First Minister Nicola Sturgeon announced her next steps in the cautious reopening of the Scottish economy. Whether it is the reopening of beer gardens or a review of the two metre rule which renders the most companies in the consumption economy unviable, the First Minister appears uncomfortable responding to business desperation to get back underway.
The trouble is if she delays reopening too long, the main UK schemes of business support will be coming to an end before Scottish businesses have had a fair chance to rebuild.
Calling for the Job Retention Scheme to continue long term looks destined to fail. Instead the UK Government is opting to rely on reopening the economy hoping companies will have time to test out consumers’ post-crisis preferences and adapt to meet them.
The joust at the weekend between Scotland Office Minister Iain Stewart and Scottish Tourism Secretary Fergus Ewing captured the argument. Stewart called for the Scottish Government to be more ambitious in restarting the economy whilst Ewing responded with a demand for longer term support for the tourism industry - including extension of JRS after October and a cut in VAT to 5%.
I find myself agreeing with both.
Companies are under severe financial pressure to get started again. The JRS has been essential but rents, insurances, leases and bank loan interest have at best been delayed, and debts are piling up.
Over £35bn in emergency lending has been distributed across the UK. Owners and directors know they do risk becoming zombie companies the longer they are required to stay shut.
These businesses, mostly small in industries like hospitality, retail, entertainment or personal services - not the favoured children of national economic development agencies - are the bedrock of our business base. We need to get the economy open and change the two metre rule to make that effective.
The UK Government also has to be creative with tax reductions, demand stimuli and targeted grant support to help businesses who, through no fault of their own, find themselves on the verge of becoming the dreaded ‘zombie companies’.
This article first appeared in Glasgow Chamber’s weekly column in The Herald newspaper on June 24.
