18 Mar 2013

Zombie Britain and a decade of rot?

In an abandoned shopping mall in Reading the undead stalk the living through a smoky, eerie, apocalyptic vision of zombie-ridden Berkshire. It is the latest in live entertainment. Being part of your own film. It is fabulously popular, aficionados of the undead fly in from the US, even Australia, for the chance to be scared witless by professional zombies. Even here, though, the weak economy lurks in the background.

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The IT consultant turned professional zombie. The young graduates in a portfolio of short term, insecure work they did not expect after getting a degree. The graduate debt holding back 20-somethings from consumer spending and the housing market, even before tuition feed. But UK economic zombieism runs deeper than a Berkshire fright night.

In this week’s budget, the pressure of on the chancellor to get the economy growing again, fast. But what if there is no quick fix? What if there is a much darker survival problem – and the economy needs much harsher measures to rejoin the land of the living?

The numbers on Wednesday will continue to be drenched in red. The year when debt falls as a proportion of the economy is likely to be delayed by another year to 2017/18. Underlying deficit in this financial year is likely to be higher than last, when you strip out the one-off special factors. Even if there is a triple dip (on the cards, not a done deal), there’s been almost no growth for three years.

More from Channel 4 News: Is George Osborne a dead man walking?

The eurozone crisis has defined the coalition‘s economic backdrop. Cyprus will get a mention in the budget speech, I’m sure. It entered government with the Greek conflagration getting out of control, used it to get a mandate of sorts for deficit reduction. The euro crisis has become not just the first alibi for no-growth triple-dip Britain, but the clearest government argument for dealing with its public debts.

But has that been at the expense of dealing decisively with private debts? A zombie economy that is not collapsing, but not growing, with zombie businesses unable to grow out of their overhang of debt, and zombie households only managing to pay the interest on their loans.

‘Classic zombie company’

Gardner Aerospace in Derby makes high-spec hand finished parts for Airbus. It built up debts in the good times. Or rather it was left with huge debts from a debt-fuelled private equity takeover. After the crash, profits were diverted to paying the interest on those debts – and nothing spent on investment or extra jobs, even when there was demand to meet.

The business stood still until its bankers decided to cut losses and sell up. Work was done out of a cramped three-floor old building sandwiched between railway lines, and a housing estate. Metal theft was a major concern. Last week Phil Jarvis, the new chief executive, took me round the incredible state-of-the-art new facility in Derby. He says Gardner was the classic zombie company.

Gardner was able to service its debts just, but not grow. But one explanation for weak exports and the weak economy facing the chancellor is that too many other companies still languish under their debt burdens from the good times. Across Britain, one-in-11 companies can only afford to pay the interest on their debts, one definition of “zombie business”.

In England and Wales, far fewer companies are going into liquidation than in the recession of the early 1990s. But far more companies are loss-making. Some of this is down to changes in insolvency law, but clearly fundamentally weaker businesses are being kept alive. Partly by low interest rates, and partly by banks holding off calling in loans.

Draining the blood out of the recovery

Families have got into just as much debt as some companies. Jennifer Williams went back to university to boost her skills. But it left her with debts of £40,000. She’s slowly paying that back. Her only income growth has come from bank refunds for mis-sold payment protection insurance: spent on paying off debts. She and millions like her are in no position to boost the economy with consumer spending.

What unites indebted households and indebted companies is the banks, especially the state-owned ones. They have a vested interest in keeping the zombie companies on life support because then they don’t have to set aside money to cover the losses they will make on loans that will never be repaid. Unfortunately, it also makes them less willing to create new loans even for profitable new business, hobbling the wider economy.

The bigger picture here is that low interest rates and banks not calling in rotting loans made sense when the economy needed to be rescued after the crisis. But as a long-term strategy; not dealing with Britain’s private debt is now creating problems, draining the blood out of the recovery.

Banks hoard capital. Companies can’t invest. Households don’t spend. Half of all mortgages in London are interest-only. More of the same “extend and pretend” could lead to a long term Japanese-style rot. Other countries like Sweden dealt aggressively with private debts, painfully cleansed their banking systems, and then grew again.

Meanwhile back in Reading, the good news for Mr Osborne is that the zombie outbreak at this abandoned Reading shopping mall is actually part of his much-vaunted private sector recovery. This company in Reading has become an export success. Ironically, the actual business involving zombies is a classic example of how successful businesses are affected by a zombie economy. Tickets are sold out for the next six months but it’s struggled to even get a simple trading account from a bank because it is seen as risky.

So is this the real reason why Britain is not growing, that few want to face up to? The chancellor judges himself on dealing with the public debt. But it is the all-pervading horror of the burden of boom-time private debt holding back lending, spending, and investment. It was understandable to soothe the pain after the financial collapse. But is it now condemning Britain to a decade of rot?

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