15th February 2026
For much of the past decade, the UK economy has been characterised by an unusual phenomenon. The prolonged survival of older, less productive firms that, in earlier eras, would likely have exited the market.
These so-called "zombie firms" are businesses generating too little profit to meaningfully invest, innovate, or grow were able to stagger on for years. Recent analysis by the Resolution Foundation suggests that this era may now be drawing to a close.
The change is not the result of a single policy decision or economic shock, but rather the convergence of several forces that are restoring a more traditional form of market discipline.
Cheap Money and the Suspension of Normal Market Forces
Following the global financial crisis, interest rates remained historically low for more than a decade. This environment fundamentally altered business survival dynamics. Firms that would once have failed were able to refinance debt cheaply, roll over loans, and remain solvent despite weak productivity and low profitability.
Low interest rates reduced the pressure to restructure or exit, encouraging what economists describe as "capital misallocation" — where labour and investment remain tied up in inefficient firms rather than flowing to more productive ones. Over time, this dampened productivity growth across the economy as a whole.
The Turning Point: Higher Rates and Tighter Credit
That equilibrium has now shifted. Rising interest rates have sharply increased the cost of servicing debt, exposing firms that were only viable under ultra-low borrowing costs. At the same time, banks have become more selective, less willing to extend credit to chronically underperforming businesses, and more inclined to recognise losses rather than defer them.
This tightening of financial conditions has reintroduced a basic but powerful test of viability: whether a firm can cover its costs, invest for the future, and generate sustainable returns under normal economic conditions.
The Withdrawal of State Support
The COVID-19 pandemic further prolonged the life of many fragile firms. Emergency government measures — including loan guarantees, tax deferrals, and wage subsidies were deliberately designed to prevent mass unemployment during an unprecedented crisis.
While effective in stabilising the economy, these policies also delayed necessary market exits. As support has been withdrawn, firms that depended on it have increasingly found themselves unable to continue, contributing to a rise in insolvencies that reflects not sudden collapse, but deferred adjustment.
Cost Pressures and Productivity Gaps
Inflation has intensified this process. Rising wages, energy prices, rents, and input costs have squeezed margins, particularly for firms with outdated business models or limited pricing power. More productive firms have been better placed to adapt, invest in efficiency, and pass on costs. Weaker firms, by contrast, have been exposed.
The result is a widening divide between high-productivity businesses capable of growth and low-productivity firms increasingly unable to compete.
What This Means for Jobs and Wages
In the short term, the exit of zombie firms inevitably brings job losses. Workers employed by failing businesses face uncertainty, displacement, and the disruption that accompanies redundancy. These effects are often concentrated in specific regions or sectors, making them socially and politically sensitive.
However, over the medium to long term, the reallocation of labour away from unproductive firms tends to support higher wages and better job quality. When labour moves to more productive businesses, output per worker rises, creating scope for wage growth. Economies dominated by firms that merely survive rather than grow struggle to deliver rising living standards.
In this sense, firm exits are not simply losses; they are also a mechanism through which labour is freed to flow toward higher-value activity.
The Risks of Too Many Firms Failing at Once
That said, there are real dangers if adjustment happens too quickly. A sharp wave of failures can overwhelm labour markets, strain social safety nets, and reduce investment confidence. When many firms fail simultaneously, workers may struggle to find new employment quickly, particularly if failures are regionally clustered.
There is also a macroeconomic risk.
If credit tightens excessively and viable firms are dragged down alongside weak ones, the economy may undershoot, turning necessary restructuring into a deeper downturn. Policymakers therefore face a delicate balance — allowing market discipline to return without triggering a cascade of avoidable failures.