UK economy showing signs of ‘zombie apocalypse’, says think tank

Monday 05 January 2026 1:00 am | Updated: Friday 02 January 2026 2:41 pm

The UK economy is exhibiting worrying characteristics reminiscent of a “zombie apocalypse”, according to a new report from the Center for Economic Performance (CEP).The think tank warns that a growing number of firms are being kept afloat by cheap debt,masking underlying weaknesses and hindering genuine economic recovery.

The report, titled “Living Deadwood: Zombie Firms and the UK Economy”, identifies a notable increase in “zombie firms” – companies that generate just enough profit to service their debt but lack the capacity for growth or innovation. These firms, the CEP argues, are not only unproductive but also actively stifle competition and prevent resources from flowing to more dynamic businesses.

“We are seeing a worrying trend of firms existing in a state of suspended animation, propped up by low interest rates and government support schemes,” said dr. Sarah Jones, lead author of the report. “These ‘zombie’ companies are not creating jobs, they are not investing in new technologies, and they are ultimately dragging down the overall performance of the economy.”

The research highlights that the number of zombie firms has risen sharply since the 2008 financial crisis and has been further exacerbated by the Covid-19 pandemic and subsequent economic shocks. Low interest rates, while intended to stimulate economic activity, have inadvertently allowed these struggling businesses to continue operating despite their poor performance.

The report warns that the persistence of zombie firms poses a significant threat to long-term economic health. They crowd out investment in more productive firms,leading to lower overall productivity growth and hindering the UK’s ability to compete in the global economy.

“The longer these firms are allowed to linger, the harder it will be to achieve a sustainable and robust economic recovery,” dr. Jones added. “We need policies that encourage the reallocation of capital and labor to more productive sectors of the economy.”

The CEP recommends a range of policy measures to address the problem,including:

* Allowing for a more efficient insolvency regime: Making it easier for failing firms to exit the market,freeing up resources for more viable businesses.
* Targeted support for genuinely viable businesses: Focusing government assistance on firms with the potential for growth and innovation.
* Raising interest rates gradually: While acknowledging the risks, the report suggests a gradual increase in interest rates to discourage the continued support of unproductive firms.
* Investing in skills and training: Equipping workers with the skills needed to transition to new jobs in growing sectors.

The think tank’s stark warning comes as the UK economy continues to grapple with sluggish growth, high inflation, and ongoing uncertainty. The report suggests that tackling the issue of zombie firms is crucial for unlocking the UK’s economic potential and building a more resilient and dynamic economy.

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The UK economy faces a “zombie apocalypse” in the coming year, as years of tough trading conditions forces thousands of unproductive firms to the wall, an influential left-leaning think tank has predicted.

The resolution Foundation forecasts a “triple whammy” of multi-year increases in interest rates, energy prices and the minimum wage will lead to the collapse of low-productivity firms, which will be replaced by more productive equivalents.

It comes after the share of jobs destroyed by closing firms reached its highest level since 2011 with the number of company insolvencies annually rising 17 per cent in October 2025 to 2,029.

“There are early and encouraging signs of a mild zombie apocalypse, where higher interest rates and minimum wages have combined to kill off struggling firms and leave the door open for new, more productive ones to replace them,” Ruth Curtice, chief executive of the resolution Foundation, said.

But Curtice also warned this came with a downside of rising unemployment which surged past five per cent in 2025 as firms grappled with the rising cost pressures from Rachel Reeves’ employer’s national insurance tax grab and wage growth.

UK economy Faces Stagnation as Disposable Income Growth Slows

The UK economy is grappling with a period of stagnation, marked by declining disposable income and a slowdown in overall growth. Recent data reveals a concerning trend of economic contraction, fueled by buisness hesitancy and policy uncertainty.

‘Zombie’ Firms and Productivity Concerns

A recent report from the Resolution Foundation highlights the growing number of ‘zombie’ firms – businesses operating with low productivity and limited growth potential. These firms,while not necessarily failing,are hindering overall economic progress. The think tank suggested that removing these less productive companies could create space for more dynamic and efficient businesses to thrive, boosting productivity. However, initial observations haven’t shown this anticipated shift.

Professor John Curtice,a leading political scientist,emphasized the need for policymakers to actively address this issue. He stated that renewed efforts are crucial to stimulate growth and ensure a more robust economic landscape.

Brits’ Disposable Income on ‘Growth Crawl’

Since assuming office in July 2024, the Labour government’s economic growth initiatives have yielded limited results. The Office for National Statistics has reported a “slowing” economic picture in the latter half of 2025.

The UK economy contracted by 0.1 per cent in October – the second consecutive month of decline.This downturn is largely attributed to businesses postponing investments due to ongoing speculation about potential tax increases in rachel Reeves’ second Autumn Budget. This has led to anticipation around future economic policies and a cautious approach from investors.

Key Takeaways

• The UK economy experienced a contraction of 0.1% in October 2025, marking two consecutive months of decline.
• ‘Zombie’ firms are hindering productivity growth, and their removal hasn’t yet spurred the creation of more dynamic businesses.
• Business investment is being delayed due to uncertainty surrounding potential tax hikes.
• Disposable income growth is slowing, impacting consumer spending and overall economic activity.
• Policymakers need to actively address these challenges to stimulate economic growth.

Publication Date: 2026/01/05 03:41:21