The Zombie Company Effect
Ultra-low rates keep dying firms alive, blocking creative destruction and killing productivity growth
When interest rates fall to near zero, companies that would ordinarily go bankrupt — those whose revenues can barely cover costs let alone service debt — survive instead. Because even minimal interest costs can be met when rates are a fraction of one percent, the normal mechanism of business failure ceases to function. These are what Chancellor calls zombie companies: the Living Dead, moving slowly through the economy, occupying market share, retaining employees, but investing almost nothing and generating no real returns.
The consequence is systemic. Normally, capitalism's creative destruction — Schumpeter's brutal but productive engine — takes capital from failing enterprises and reallocates it to more productive ones. When zombies persist, two things happen: new entrants see no reason to compete in zombie-infested sectors (who enters a market full of half-dead competitors offering low prices with no margin?) and existing productive firms face unfair competition from subsidised inefficiency. The entire sector becomes a low-productivity equilibrium.
This is what Chancellor argues produced Britain's worst productivity growth since the Industrial Revolution in the decade after 2008. Insolvency experts in 2010 predicted a wave of business failures — the logical consequence of the Great Recession — but almost none came. The intervention of near-zero rates replaced natural market discipline with artificial survival, and the productivity bill came due across the whole economy.
- Interest rates set the minimum viable return on capital — suppress them and you subsidise failure.
- A zombie company occupies productive resources (capital, labour, market share) without generating the returns that would justify their use.
- Creative destruction is the core productivity engine of capitalism; anything that blocks failure blocks growth.
- Entire sectors can enter low-productivity equilibria when populated by zombies — no rational new entrant competes against a firm that cannot go bust.
- The longer the zombie period, the more productive capital is trapped and the steeper the eventual productivity catch-up needed.
- Identify sectors with abnormally low insolvency rates despite poor returnsScreen for industries where profit margins are thin or negative but failure rates are below historical norms. This is the signature of zombie concentration — firms that should fail are being kept alive by cheap debt rather than genuine competitive advantage.Pro tipCompare interest coverage ratios (EBIT / interest expense) across sectors. A ratio below 1.5× in a near-zero rate environment is a zombie signal — that business cannot survive even a modest rate rise.WarningGovernment support schemes (furlough, loan guarantees, debt moratoria) can temporarily mask zombie concentration even when rates are rising — distinguish policy-support zombies from rate-support zombies.
- Assess productivity and investment levels in the sectorZombie-heavy sectors show declining capital expenditure per employee and flat or falling revenue per worker. New entrants are absent. Pricing is sticky downward (zombies cut price to retain volume) but innovative products are rare. This is the tell of a sector in low-productivity equilibrium.Pro tipTrack R&D spend as a fraction of revenue. Zombies typically cut R&D to zero — it is the first discretionary cost to go when debt service absorbs most of operating cash flow.
- Monitor the rate reset calendarZombie companies that borrowed at fixed rates near zero have a survival clock: when their fixed-rate debt matures and must be refinanced at current rates, the subsidy ends. Map the maturity schedule of corporate debt in zombie-suspected sectors to forecast when failures will cascade.Pro tipWilko's collapse illustrates this precisely: a business that appeared viable for years failed quickly once refinancing at higher rates became unavoidable.WarningDo not confuse the absence of failure with solvency. Accounting profits at near-zero interest cost can turn into losses instantly when debt reprices.
- Position around the creative destruction waveWhen zombies finally fail, the capital and market share they occupied becomes available to genuinely productive competitors. This creates investment opportunities in sector leaders with strong balance sheets who can acquire distressed assets, consolidate market share, and operate at higher margins once the zombie subsidy ends.Pro tipThe quality spread in most sectors — the gap between returns earned by the best and worst operators — widens after zombie clearance. The survivors' returns improve faster than consensus expects.WarningTiming the clearance wave is difficult. Chancellor's own experience with the JGB trade shows that logically correct theses can be early by years.
- Apply the same lens to government spendingChancellor extends the zombie logic to government: when borrowing costs were 10 basis points via QE, governments spent with less discipline than they otherwise would — COVID-era furlough, eating-out subsidies, unfocused stimulus. Rising rates tighten fiscal discipline the same way they tighten corporate discipline, forcing resource reallocation from low-value to high-value uses.WarningGovernments, unlike companies, can print money rather than go bankrupt — so the fiscal zombie dynamic resolves through inflation rather than insolvency. Factor this into sector positioning.
Wilko was a UK discount retailer that competed in a sector populated by similar low-margin businesses. As interest rates rose from mid-2022, its refinancing costs rose with them. Chancellor uses it as a textbook zombie: barely profitable or loss-making at near-zero rates, viable only because debt service was trivially cheap.
Britain experienced its lowest productivity growth since the Industrial Revolution in the decade following the global financial crisis. Economists debated supply-side explanations. Chancellor connects the timing directly to zombie company persistence: capital that would have been reallocated to productive uses was instead trapped in Living Dead firms.
Insolvency experts in 2009–2010 prepared for a surge in mandates consistent with a deep recession. Chancellor notes they were 'rubbing their hands' expecting a wave of corporate failures — and almost none came. Business insolvencies were abnormally low throughout the recovery, defying all historical post-recession patterns.
Chancellor observed the paradox while researching The Price of Time: after the global financial crisis, insolvency professionals expected a surge of bankruptcies consistent with the depth of the recession. Instead, insolvency rates were abnormally low — lower than would be expected even in a mild downturn. Cross-referencing this with UK and US productivity data — which showed historic lows in output-per-worker growth — he identified the connection: zombie persistence suppressed creative destruction, and suppressed creative destruction suppressed productivity growth. The Wilko (Wilkinson's) collapse when rates eventually rose served as a concrete illustration: a business apparently viable for years that collapsed almost immediately once real borrowing costs returned.