Did the COVID-19 pandemic zombify the economy? A look at zombie firms

Abstract

Zombie firms are businesses that persistently perform poorly over time without exiting, and their prevalence has been rising over time across many advanced economies. They negatively affect economic growth as they tend to be unproductive and compete with other healthy firms for scarce resources. In Canada, while the share of zombie firms was falling leading up to the COVID-19 pandemic, they were becoming less productive over time, were negatively affecting healthy firms and were increasingly lowering aggregate productivity. In 2019, aggregate productivity would have been up to 5% higher had zombie firms exited (Amundsen et al., 2023). From 2020 to 2022, aggregate labour productivity declined in the business sector in Canada. Of interest is the potential long-term effects of the economic downturn that accompanied the pandemic. In addition, a large amount of support was offered to sustain Canadian businesses during the pandemic, including the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Commercial Rent Assistance (CECRA), the Canada Emergency Rent Subsidy (CERS) and the Canada Emergency Business Account (CEBA). Some have noted that the scale and swift implementation of pandemic-related measures globally had the potential to accelerate zombification and constrain the post-pandemic recovery (for example, OECD, 2020). This article summarizes recent research by Amundsen et al. (2025) that examined zombie firm prevalence and the dynamics of these firms over the 2020-to-2022 pandemic years, the role of business supports in helping to prop up zombie firms or encourage their survival, and their contribution to the decline in Canada’s productivity. Zombie firms are defined as having earnings before interest and taxes less than their interest payments for 3 consecutive years and as being at least 10 years old.

Keywords

• economy
• business
• zombie firms
• productivity
• covid-19
• labour