Zombie firms 'threaten German recovery'

A leading banker says struggling firms kept afloat by state support will hinder the Eurozone powerhouse's recovery

Deutsche Bank's Christian Sewing
Deutsche Bank's Christian Sewing is cutting 18,000 jobs across the company

The coronavirus crisis could turn one in six German businesses into “zombie” companies dependent on state handouts for survival and drag down Europe’s biggest economy, a senior banker has warned. 

Christian Sewing, the chief executive of Deutsche Bank, said in a speech in Frankfurt that the large number of so-called zombie firms in Germany would have "a serious impact on the productivity of our economy".

So-called "zombie" companies – often debt-laden and kept from insolvency by record low interest rates as well as government subsidies or bailouts – are seen as a driver of inefficiencies as they prevent resources being funneled elsewhere.

Chancellor Angela Merkel has pumped more than €1 trillion (£880bn) in support to shield companies and workers from the pandemic fallout, including guarantees, loans, grants and subsidised wages through an extension of its Kurzarbeit scheme. 

The measures have included a freeze on insolvency rules put in place to avoid a wave of corporate bankruptcies, which offers firms a respite by allowing them to delay filing for bankruptcy. Last week the waiver was extended until the end of the year. 

But Mr Sewing cited a study by credit agency Creditreform, which said that the number of zombie companies in Germany could double to one in six as a result of bailouts related to the pandemic.

He warned of the potential economic handbrake from the virus "at a time when Covid-19 is accelerating many structural upheavals – from digitisation to the pressure to operate more sustainably – when the economy must therefore adapt exceptionally quickly."

Mr Sewing argued that the process of economic restructuring was delayed "when companies are primarily waiting for everything to go back to the way it was before".

The Creditreform report estimates that some 550,000 German companies will be “zombies” in September, compared with 330,000 two years ago. 

The chief executive, who has launched his own overhaul of the lender in a restructuring which will cost 18,000 jobs, added that a "return to old economic strength will take longer than is generally assumed".

Germany’s economy sank by a record 9.7pc between April and June and Mr Sewing warned. "We will not reach the pre-crisis level for a long time – not this year and not next. 

"We have to be prepared for the fact that the economy is only running at 90, 80 or even 70pc of its capacity in some areas. That has serious consequences."

The chief executive's warning over the economy was borne out by a surprise slide in German retail sales during July, despite a €20bn temporary cut to VAT until the end of the year in a bid to boost domestic demand. 

The European giant has thrown aside previous fiscal caution with a package set to boost borrowing by €218bn this year. But retail sales dipped 0.9pc over the month despite the VAT cut, confounding expectations of a 0.5pc rise.  Analysts said some companies were not passing on lower prices to consumers while shoppers remained cautious.