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Home / Markets / Mark To Market /  Zombie firms cloud jobs outlook even as vaccination picks up pace

Multiple challenges have forced Indian services providers to resume job shedding, showed the latest purchasing managers’ index (PMI) survey. Employment in the private sector declined for the ninth consecutive month in December, remaining in the contraction zone.

The PMI survey showed that employment trends in the manufacturing sector were equally disappointing, even as the pace of factory output strengthened.

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Overall, the Composite PMI reading for employment fell from 49.5 in November to 48.9 in December. A reading of above 50 indicates expansion and below the threshold points to contraction.

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Even though demand may gradually improve aided by a pickup in the pace of vaccination, lack of adequate employment opportunities is likely to remain a pain point.

One of the fallouts of this huge fiscal spending and monetary easing across the world is a prolonged existence of zombie firms.

Zombie companies are entities that are in huge debt and any cash generated is used to service debt rather than expand capacity or employ more staff.

Economists point out that the rise in the number of zombie companies makes the employment outlook grim.

“Easy monetary conditions enable zombie companies to stay in business by raising funds at a cheap cost. Government support in the form of stimulus and loan extensions would keep them afloat for now, but once this lifeline ceases, these companies would likely go bust, weighing on the entire financial system. And this is likely to be a global problem. So, the outlook for employment remains dull," said an economist with a multinational research house, requesting anonymity.

Commenting on the latest survey results, Pollyanna De Lima, Economics Associate Director at IHS Markit, said, “The latest PMI readings for the euro zone, the US and other Southeast Asian countries point to a discouraging employment scenario". Globally, services providers, especially those in the travel and tourism sectors, have borne a higher brunt of the coronavirus pandemic than manufacturers, she added.

In its latest global economic outlook report, Rabobank warned that in the aftermath of the pandemic, the global economy will have to deal with a huge rise in zombie firms.

“By providing credit and capital to firms hit hard by the corona crisis, governments might have averted pain in the short term; however, the downside is that this credit and capital is not being allocated towards more productive parts of the economy," it said in a report published in December.

Further, the global research firm cautioned that a rise in zombie firms will weigh on employment growth and productivity in the medium to long term.

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