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Economists fear new generation of 'zombie businesses' after coronavirus crisis

File Photo: Zombies read a copy of the Standard. Backyard Cinema had pop-up "Zombie Apocalypse" screenings in 2014: Stuart C. Wilson/Getty/Backyard Cinema
File Photo: Zombies read a copy of the Standard. Backyard Cinema had pop-up "Zombie Apocalypse" screenings in 2014: Stuart C. Wilson/Getty/Backyard Cinema

COVID bailout loans that have kept businesses alive during the crisis could later turn into a burden that prevents growth, economists warned today.

Figures today show the UK economy grew by just 1.8% in May, far below City forecasts of 5.5%, suggesting talk of a “V-shaped” recovery is optimistic.

Another fear is that well-meaning government bailouts could later act as a drag on any bounce back, as businesses are left fighting to service loans rather than expand.

After the financial crash, ultra-low interest rates led to thousands of so-called “zombie” firms, that just about survived but could do little but service debt. Economists fear a new generation of “Covid Zombies” could now be emerging.

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Richard Hughes, head of the Office for Budget Responsibility, thinks that loan repayments should be earnings contingent, so that firms aren’t having to pay back amounts that are excessive relative to their turnover.

Mark Palmer at Hamilton Court FX said: “Covid bailout loans that countless businesses have taken up may go from being a short-term survival aid to a long-term weight around their necks. (Hughes) thinks that it could be the case that businesses with such a debt burden are less likely to invest and would therefore potentially just tread water rather than grow.”

Today figures from the Treasury show that the Coronavirus Business Interruption Loan Scheme has paid out £11.8 billion to nearly 55,000 firms.

The small May increase in GDP compares to a 20.3% plunge in April suggesting the route back to recovery could be lengthy.

Rupert Thompson, chief investment officer at Kingswood, said: “While the manufacturing and construction sectors both saw gains of over 8% in May, the service sector rose only 0.9% m/m as lockdown had only just started to be relaxed back then.”

Some City economists say that the government’s support package for firms may simply delay the agony of inevitable high unemployment.