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New York (CNN Business)1. Easy money:The past decade of ultra-low interest rates has spawned the rise of zombie companies.
These debt-laden firms dont make enough to even cover their interest payments. Thats never a good sign.
The number of zombie companies in advanced economies last year stood at 536, or 13% of the total, according to Bank of America Merrill Lynch.
Thats a surprising figure given that the global economy was strong in 2018. In fact, the number of zombie companies isnt far from the peak of 626 seen during the depths of the Great Recession, BofA said.
Last time it was easy to be a zombie because everyones profits were collapsing, Michael Hartnett, BofAs chief investment strategist, said in an interview.
So whats the excuse this time? Economists blame the era of extremely low interest rates.
Easy money allows companies to borrow cheaply. And low rates encourage investors to gamble on riskier companies.
The Federal Reserve held interest rates near-zero for almost a decade and pumped its balance sheet up to $4.5 trillion.
Central banks have pushed interest rates to zero. Therefore, nobody can go bankrupt, Harnett said.
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While the Fed steadily raised rates beginning in 2015, itannounced plansthis month tohalt rate hikes because of slowing economic growth.Central bankers in Europe and Japan, meanwhile, haveyet to lift interest rates out of negative territory.
Borrowing money, especially at affordable rates, is not a bad thing at all. Adding debt allows companies to invest in the future by building new factories, buying equipment, hiring workers and researching next-generation products. And easy money helped breathe life into global stock markets, inspiring confidence along the way.
You are keeping companies afloat that should not be in business, Hartnett said. Those businesses are using resources — such as capital or labor — that could be used more efficiently elsewhere.
To stay alive, zombie companies require greater and greater amounts of capital. They need to frequently tap the capital markets for more of it.
Zombie firms are less productive and crowd out investment in and employment at more productive firms, Ryan Nilandri Banerjee and Boris Hofmann wrote in aSeptember 2018 paperpublished by the Bank for International Settlements, which is owned by 60 global central banks
The BIS paper found that the presence of zombie firms has ratcheted up since the late 1980s — a period of stubbornly low interest rates. While only 2% of companies in advanced economies were zombies in the late 1980s, the authors said that figure climbed to 12% in 2016. And rather than recovering or exiting the zombie state through bankruptcy, companies today tend to stay that way for longer.
The phenomenon isnt healthy because of how it saps the rest of the economy of resources. But it might not become a problem as long as interest rates remain low.
The catch would be if historically low unemployment in the United States and a shortage of skilled workers causes wages to rapidly rise. That would force the Fed to resume aggressive interest rate hikes.
If inflation starts surprising to the upside, then suddenly these zombie companies have a much bigger problem, BofAs Hartnett said.
The US jobs report for March comes out on Friday and it will give greater insight into how much wages are rising.
The US economy addedonly 20,000 jobsin February, a surprisingly low number that fell short of huge jobs gains in the months prior. Economists will watch to see if it was a one-time fluke or part of a broader trend.
Theres some concern that Februarys numbers were a sign that the economy is running out of available workers after 101 consecutive months of job growth.
UK lawmakersrejectedPrime Minister Theresa Mays Brexit deal for a third time on Friday, extending the countrys political and economic uncertainty.
The rejection raises the chances of either a longer delay to Brexit or the United Kingdom crashing out of Europe without a deal on April 12. Parliament will hold a second vote on alternatives to Mays deal Monday.
After a horrible end to 2018, stocks notched one of their best first quarters ever. The S&P 500 rose 13
Thats boosting optimism heading into the second quarter, even after the US bond marketflashed recession.
A big start to the year historically has suggested the bulls could remain in charge the rest of the year, said Ryan Detrick, senior market strategist at LPL Financial, in a recent note. In fact, 9 of the past 10 times the S&P 500 was up at least 10% during the first quarter, the rest of the year was also in the green.
US February retail sales; US ISM manufacturing
earnings; Reserve Bank of India rate decision
US March jobs report; EU finance ministers meet