Canada has a large — and growing — population of so-called “zombie firms,” but they aren’t likely to pose much of a threat to the financial system, the Bank of Canada finds.
New research from staff of the central bank examined the phenomenon of zombie firms — businesses that have been operating for some time but have trouble generating enough income to cover their interest payments.
In 2018, about 25% of Canadian companies were considered zombies, the Bank found. It also reported that “the share of zombie firms in Canada has been increasing since the mid-1990s.”
According to the Bank, Canada has a much higher proportion of moribund companies than other markets. It cited prior research that found that about 12% of companies in advanced economies are zombies.
“The growing share of zombie firms and their relatively large prevalence in Canada is due mainly to firms in commodity industries,” the Bank noted.
It said that about two-thirds of the zombie firms in Canada in 2018 were in industries that are exposed to commodity prices.
“The noticeable pickup in the share of zombie firms starting in 2014 is tied to weakness in metal and mineral prices in 2011–12 and then to a broader-based decline in commodity prices in 2014–15,” the central bank reported.
The Bank’s paper noted that previous studies have found that “zombie firms lower productivity and economic growth by tying up resources that could be used by more productive firms.”
However, it also concluded that Canada’s zombies don’t pose a significant risk to the financial system.
“We find that zombie firms account for less than 2% of the overall debt, employment or market capitalization among all Canadian firms. This implies that defaults by zombie firms would not impose large losses on creditors or shareholders,” the Bank said.