Canada has a zombie problem

You may not have anything to fear from infectious fungi, but Canada has a zombie problem nonetheless.

Driving the news: Statistics Canada analysis released last week shows that “zombie firms”—mature businesses that survive despite not making enough money to cover the interest payments on their debt—make up a growing share of Canada’s economy. 

• Zombie firms consume 8.3% of Canada’s capital (up from 3.1% in 2002) and account for 5.3% of employment in the country (up from 3.6% in 2002).

Why it matters: You likely could have guessed from the name, but zombie firms are bad news for an economy and its workers, lurching from year to year without ever generating the cash needed to re-invest in their businesses.

• As a consequence, they tend to pay lower wages and be less productive than healthy firms. They’re also likely part of the reason Canada’s productivity trails almost all other wealthy countries.
   
• Zombie firms also infect healthy ones in their sector by tying up resources they might have used to increase their own productivity and growth.

Why it’s happening: Zombie firms may be another creature of zero-interest-rate policy, which allowed unhealthy businesses to survive off cheap debt, along with pandemic-era supports that kept many companies—healthy or not—alive.

• Canada may be particularly vulnerable to zombies because they tend to proliferate in the commodity sector, which is a large part of our economy.

What’s next: The era of cheap money is over (for now), and the walking dead of the business world may soon face a reckoning as they’re forced to take out new loans at higher interest rates.