Published on 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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18 reader comments

  1. Philip Edwards says:

    Faisal,

    Last time I could be bothered to look, UK personal debt stood at £1,456 trillions. UK public sector debt in the same period ran at £1,022.5 billions. Plainly, the UK public sector has a lot of debt to accrue to match debts created by “entrepreneurs” and “risk takers.” So does the USA. Their comparative figures are: total personal debt at $38 trillions and total public sector debt at $15.5 trillions.

    With that kind of disparity you have to say among the zombies are the mainstream media “economics correspondents” who ignore the corrupt realities of a failed economic system.

    And still the lies and propaganda go on. But who manufactures it? Zombies?

    1. Jonathan says:

      @(Philip Edwards) – I notice some websites say 1.400 trillion and others 1,400 trillion as the figure for Consumer or Household debt. Factor of 1000 different – wonder which one is accurate. However, according to National Statistics, household debt excluding mortgages is about £100 bn or £3,000 for each household in debt.
      It can be argued that mortgage debt is matched by a real asset (that is a house) and so, assuming no catastrophic economic collapse, will be paid off. Government debt isn’t backed by a “real” asset. Instead it is backed by the ability and willingness of its citizens to work and pay taxes.
      A few years ago Goldman Sachs produced a paper which showed debt from the government, non financial corporations, financial corporations and households had reached about 400% of GDP in the UK. This was roughly the same level as Japan (lost decades). Since then the overall total debt has come down – and the 400% made no allowance for matching assets.
      The worrying/annoying aspect of government debt is that it represents a future claim on our earnings. In the UK each individual now owes £15,000 to the government.

  2. Ahsan Raza says:

    excellent post Faisal.

  3. sue_m says:

    What did Sweden do Faisal? And can someone mention it to Osborne?

  4. benf says:

    Why don’t we try to ramp house prices again to clear the debt? Oh yeah, it’s not wealth creation as someone has to go into more debt to enter the housing market. Hmm – the UK is toast!

  5. Scott says:

    There will be no recovery. See you on the streets soon.

  6. Dave Lucas says:

    The collapse of the monetary/market economic system is a mathematical certainty, and keeping ‘zombie’ companies afloat is the only way to hide the natural levels of technological unemployment and debt collapse that mark the demise of this system. For anyone who hasn’t seen it, I strongly recommend this highly sourced and revealing documentary about the new socio-economic system we must now adopt: http://www.zeitgeistmovingforward.com

  7. Cliff Fiscal says:

    I watched C4 news because of this zombie economy theme and it’s so refreshing to hear some level of honesty in regard to the monumental deadzone that is global economics. Sideline commentators have been warning of the depth of financial mayhem that’s coming and as overly inflated fiat currency starts to collapse as everyone realises there’s little value to back it up any more. Debt is an absolute killer as we all know and the banking groups have flourished by manipulating governments and private individuals into it on a grand scale. The whole system is controlled by them and our impotent governments are drowning in debt as a result. The elite never give anything sizeable back – they have always taken so unless they bail us out of this mess then their monopoly board will cease to attract any players. Economists will deny all this of course – it’s in their programming..Life will go on somehow though..change is overdue..

  8. Robert Taggart says:

    As a life long scrounger – does that make Moi a zombie ?
    Fais’ – that zombie gathering in Reading – you fitted in so well !

  9. Urban says:

    So, we need debt cancellation. Default. Whatever you want to call it.

    And we need some banks to fail.

    1. Jonathan says:

      @Urban – “We need some banks to fail”. What will that achieve? We saw with Lehmans that nearly led to the collapse of the global banking system as credit dried up.
      I’m sure some small banks could fail, but any major bank failure would mean:
      – loss of wages that fail to clear through the banking system
      – mortgage defaults leading to evictions
      – job losses
      – huge increase in prices as people scramble to use what cash they have
      – large increase in poverty levels.
      However, if the Gini coefficient was to reduce, that would be a good outcome.

  10. anon says:

    Downsizing can help, I moved out of London and do not miss the traffic ,pollution etc. Life is pleasanter and I have more to spend. My pension goes further . Try moving north.

    Debt? only spend what you can afford, it really isn;t difficult to cook your own meals etc.
    A great deal of food is less expensive if you shop carefully. Of course it means cutting out the oysters fillet steak and lobster. So what else is new?

  11. Andrew Dundas says:

    Basic problem is that Osborne’s pronouncements are based on fallacies.

    Intellectual superiors to me such as Paul Krugman and Martin Wolf tell us – I believe correctly – that the debts are much less important than stagnation in our national income.
    Quite simply, when I (or you, Faisal) spend, our spending provokes someone else to replenish their stocks and too pay wages to those who do that. When I pay down debt, I reduce the supply of money in circulation, goods on the shelf languish and paid work is lost. On a larger scale that leads others into unemployment and cuts their spending too.
    Governments have little impact on any interest charges because those are a sort of opinion poll of savers and borrowers across many countries. Interest rates for ‘big money’ are negative in real terms. They’re signalling that we should borrow and spend; not save and pay back debts. Low savings rates are our punishment for ignoring these clear and persistent signals.
    When the national emergency of war threatened us in the 1930s we spent money regardless of deficits or debt. Interest rates stayed low. They stayed low even when a radical Labour majority was elected in 1945 and…

  12. Andrew Dundas says:

    Continuing: They stayed low even when a radical Labour majority was elected in 1945 and when the Tory Government was elected in 1951. Both Parties did whatever was necessary to repair the mess the war had created. And we had to pay for the Korean war too. [history seems to be threatening to repeat that bit].

    Even ‘Reinhart & Rogoff’ acknowledge that when there’s an emergency it’s usual to ignore deficits and to re-build. Which is what we should be doing now.

    Our Tory Government just doesn’t understand this worldwide crisis. They didn’t notice that it started in Wall St and that Britain was less borrowed then than either Germany or Scandinavia. We CAN spend our way out of this hole. We should do so at least on behalf of our children and grandchildren. So that they don’t inherit a broken economy.

    1. Dennis says:

      The whole worlds economy Is based on growth.but how can we continue to grow with finite resources
      ?
      Ubrill we grasp the nettle of population growth all the rest is just hot air.
      The main religions will never promote contraception and no politician will advocate voluntary euthanasia so it’s not if , but when we crash and burn as a species.

  13. Patrick Pending says:

    Nice piece, but a crucial fact is missing. The Friar Street Walk Mall in Reading, which you feature is subject to planning permission for redevelopment. So when it is demolished, the Zombie Events company will have no location to run its events from, and therefore no business! Dont think you can blame the banks for not lending to this company, without an answer tot his question.

    Perhaps the real story, is how the constipated planning system holds up redevelopments like this for so long and why property investors have been happy to sit on a derelict shopping mall in the town centre in a booming town for ten years.

Comments are closed.