These debt-laden companies are not even making enough to cover their interest payments. That's never a good sign.
According to Bank of America Merrill Lynch, the number of zombie companies in the advanced economies last year was 536 or 13% of the total.
This is a surprising number considering the global economy was strong in 2018. The number of zombie companies is indeed not far from the peak of 626, which was seen in the depths of the Great Recession, BofA said.
"Last time, it was easy to be a zombie because all profit had collapsed," said Michael Hartnett, BofA's Chief Investment Strategist, in an interview.
So, what's the excuse this time? Economists blame the era of extremely low interest rates.
With easy money, companies can borrow cheap. And low interest rates encourage investors to bet on riskier companies.
The Federal Reserve held interest rates close to zero for almost a decade, increasing its balance sheet to $ 4.5 trillion.
"Central banks have cut interest rates to zero, so no one can go bankrupt," said Harnett. Trump's election for Fed seat Stephen Moore owes $ 75,000 to Trump's "data-src-mini =" // cdn.cnn.com/cnnnext/dam/assets/1
While the Fed has steadily raised interest rates from 2015 onwards, it announced that it will halt interest-rate hikes this month due to slowing economic growth. However, central bankers in Europe and Japan do not yet have to raise interest rates out of negative territory.
Taking money, especially at affordable rates, is not bad at all. By adding debt, companies can invest in the future by building new factories, buying equipment, hiring workers, and researching next-generation products. And easy money helped bring life to global stock markets, raising confidence.
But zombie companies are wasteful.
"They keep companies afloat that should not be in business," said Hartnett. "These companies use resources like capital or labor that could be used more efficiently elsewhere."
Zombie companies need more and more capital to stay alive. They often need to tap into the capital markets for more.
"Zombie companies are less productive and are putting off investment in more productive companies and their employment," wrote Ryan Nilandri Banerjee and Boris Hofmann in a paper published in September 2018, Bank for International Settlements, owned by 60 global central banks
It's not just a problem after the crisis.
BIS newspaper notes that the presence of zombie companies has "caught up" since the late 1980s, a time of persistent lower interest rates. While only 2% of companies in advanced economies were zombies in the late 1980s, the authors said that this number had risen to 12% in 2016. Instead of recovering from the zombie state or going bankrupt, companies are staying longer this way today.
The phenomenon is not healthy because it destroys the rest of the resource economy. As long as interest rates remain low, however, this should not be a problem.
The catch would be when historically low unemployment in the United States and a lack of skilled labor lead to a rapid increase in wages. This would force the Fed to resume the aggressive rate hikes.
"When inflation starts surprisingly upward, these zombie companies suddenly have a much bigger problem," said Hartnett of BofA.
2nd Job Report: The US job report for March will be released on Friday and will give a better insight into rising wages.
The US economy created just 20,000 new jobs in February, a surprisingly low number that just fell short of huge jobs in the months before. Economists will pay attention to whether it was a one-time coincidence or part of a broader trend.
There are concerns that the February figures were a sign that the economy is running out of available labor after 101 consecutive months of employment growth.
19659017] 3rd Brexit Debate: The British legislator rejected for the third time on Friday the third Brexit Agreement of Prime Minister Theresa May, thereby widening the country's political and economic insecurity.
The refusal increases the chance that Brexit will either be delayed for longer or that the United Kingdom will crash out of Europe without a deal on April 12th. Parliament will hold a second vote on alternatives to May's Monday agreement.
4. Second Quarter Kickoff: After a dreadful end to 2018, stock prices reached one of their best first quarters. The S & P 500 rose 13 % its best quarter since 2009.
Optimism will continue in the second quarter, even after the US bond market triggered the recession.
"A Big Start to the Year It has been suggested in the past that the bulls could remain responsible for the remainder of the year," said Ryan Detrick, Senior Market Strategist at LPL Financial. "In fact, the S & P 500 has risen at least 10% in the last 10 cases in the first quarter and the rest of the year has also been in the green."
5. This week will appear:
Monday – Retail sales in the US in February; US ISM Manufacturing
Tuesday – Walgreens ( WBA ) Income; US February Orders for Durable Goods
Wednesday – ISM Services USA
Thursday – Constellation Brands [ STZ ). merits; Reserve Decision of the Reserve Bank of India
Friday – US March Labor Report; EU finance ministers meet