09/18/2018 16:08 EDT | Updated 09/18/2018 16:12 EDT

Canada's Economy Is Being Stalked By 'Zombie' Corporations, Report Warns

Businesses that can never repay their debt are the largest risk to the global economy today, some experts say.

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Zombies are stalking Canada's economy.

Not the brain-munching kind; the economy-harming, debt-sucking kind.

New research from business consultancy Deloitte finds Canada has an unusually large share of what are known as "zombie" companies businesses that have solid enough revenue to continue operating, but not enough to dig themselves out of debt.

Experts often refer to these companies as being "on life support" from their banks, continuously refinancing their debt to keep on operating.

Deloitte looked at 2,274 publicly traded companies on the Toronto Stock Exchange and TSX Venture Exchange, and found that nearly one in six (16 per cent) are "zombies."

That's considerably higher than the world average of 10 per cent, Deloitte noted. The report didn't specify which companies it identified as zombies, but the financial statements of publicly traded companies are all freely available.

The study used a 2017 definition from the OECD to determine which companies qualify as zombies: Businesses that are mature (at least 10 years old) and whose earnings "are not enough to cover the interest payments on their debts but still manage to survive," as Deloitte put it.

Until the 1980s, zombie corporations were virtually unheard of. But a long-term trend of declining interest rates has slowly made it more affordable for businesses to take on larger and larger amounts of debt.

Because they are exposed to a downturn in revenue or an increase in interest rates, zombie businesses are considered risky to the economy. In fact, they may be the single largest risk to the global economy today.

Earlier on HuffPost Canada:

In numerous interviews marking the tenth anniversary this month of the 2008 financial crisis, a number of experts who had correctly predicted that crisis were asked what could be the trigger for the next one. One of the most common answers was "corporate debt."

That's the view of Ann Pettifor, the U.K.-based economist and head of the Policy Research In Macroeconomics (PRIME) network, who predicted the 2008 crisis years in advance. Noting that global debt is now three times as large as global economic output, Pettifor warned that rising interest rates will put businesses under pressure.

"Naturally it is not going to be repaid, and naturally there is going to come a point when that debt triggers the next crisis," she said in a recent interview. "And, for me, that trigger is going to be high rates of interest."

Sucking money and talent out of the economy

But even without any sort of debt crisis, zombie corporations could still prove to be a drag on Canada's economy. The Deloitte report argues that they are holding back the economy, by tying up money and people in businesses that aren't doing much hiring or innovation.

These companies are "diverting capital and talent away from more productive firms and hindering the ability of younger, more dynamic businesses to grow," Deloitte said in the report.

If nothing is done about the problem, Canadian productivity will suffer, and in the long run, "we will not be able to enjoy the same standard of living in the future that we enjoy today," said Duncan Sinclair, chair of Deloitte Canada.

He noted that these zombie businesses in Canada have about $130 billion in capital tied up in them.

"Releasing that capital and releasing the people that are there ... will drive to a stronger economy over time," Sinclair said in an interview with HuffPost Canada.

"It's really a question of business leaders needing to take more opportunities to ... grow into new markets and sell globally."Duncan Sinclair, chair, Deloitte Canada

For all that, Sinclair said he is "optimistic" about the country's future, which the Deloitte report describes as "the best place in the world to live and work."

"There were certainly instances where companies were doing some things well, but not all things well," Sinclair said.

The report laid out a series of guiding principles to help companies avoid zombification, many of which have to do with corporate culture.

Among other things, it called on business leaders not to shy away from "tough decisions," and to build better relations with customers.

And noting that only 3.6 per cent of Canadian businesses do any exporting it suggested taking a more "global" approach to expanding businesses.

"From our perspective it's really a question of business leaders needing to take more opportunities to ... grow into new markets and sell globally," Sinclair said.