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The persistence of zombie firms in a low yield world

March 1, 2018
In the fourth part of our series on the impact of rising yields, we discuss the rising incidence of zombie firms in recent years. Bottom-up data of some 3,000 companies in the FTSE All World index show that the percentage of zombie firms has more than tripled to 2.0% of firms in 2016 from 0.6% in 1996. Such firms are defined as those with an interest coverage ratio under 1x for 2 consecutive years and a price to sales ratio under 3x. That matters because zombie firms are linked to fading business dynamism and because years of low interest rates should have led to fewer such firms, not more. There are early signs we are at a turning point, however. The numbers for 2017, with two-thirds of firms reporting, suggest that zombie firm incidence declined sharply last year. If this proves to be a real trend, it may give central banks confidence that continuing to raise rates and pull away from unconventional monetary policy will have some advantages. [more]

78 Documents
May 13, 2020
1
After shrugging off a historic plunge in April employment, market participants will likely need to digest further record-setting monthly declines in core CPI inflation as well as April retail sales and industrial production. However, with financial markets seemingly numb to the bad data news, Fed Chair Powell's appearance on Wednesday may overshadow what is likely to be epic weakness in this week's economic data. [more]
March 24, 2020
7
The world economy has, to all intents and purposes, ground to a halt with widespread social distancing and lock-down measures resulting in the closure of restaurants, retail, travel, sporting events and many other business. The impact on local and global growth is unlike any other period in the past as governments come up with economic rescue packages underwritten by central bank easing. [more]
March 3, 2020
8
Growth in luxury has been primarily driven by brand heat and newness, however millennials and Gen Z are increasingly demanding more quality and sustainability. In a recent Deutsche Bank Research consumer survey on what criteria are important for luxury spending and how they have changed over time: sustainability saw the third largest increase to importance when purchasing luxury. [more]
February 28, 2020
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10
In addition to absorbing a virus shock through the China export demand and supply chain channels, Europe now has to absorb a domestic outbreak. Voluntary steps to prevent the spread of the coronavirus (“social distancing”) as well as official containment measures are likely to disrupt economic activity. We expect disruption beyond northern Italy, an area which accounts for about 5% of euro area GDP. A temporary economic shock similar in scale to Hong Kong’s when SARS struck in 2003 would only need to occur in 10% of the euro area for area-wide GDP to stagnate in H1 and take the zone to the verge of technical recession. It is a highly fluid situation, but this might be a best case outcome. [more]
February 27, 2020
11
We revisit the debt situation in Argentina and update our assessment on debt sustainability by projecting both debt stocks and FX debt repayment capacity. Argentina’s debt problem originates from fiscal dominance and lack of nominal anchor. The problem will likely persist in the future unless Argentina implements structural reforms. Current macroeconomic conditions are significantly more challenging than in the early 2000s in terms of potential growth, inflation, and external conditions. [more]
February 25, 2020
12
The Phase One trade agreement between the US and China is more than a trade war truce and USD200 bn of purchases. It covers a broad range of topics from intellectual property (IP) protection to opening up China's market. Our broad assessment is successful implementation of this trade deal could bring sizable long-term benefits to China and the world economy. [more]
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