SCOTLAND has a higher prevalence of “zombie” firms than any other part of the UK and they are being blamed for limited domestic productivity growth and posing a threat to the economy, according to a leading business service group.

Analysis from KPMG found the zombie firms – companies under sustained financial strain – were threatening to exacerbate future economic downturns.

Scotland has up to 9% of firms in the category compared to 8% across the UK, with listed companies in education, mining and extraction, real estate and automotive industries the worst affected here.

The zombie symptoms include static or falling turnover, low profitability, squeezed margins, low cash and working capital reserves, high leverage levels and limited ability to invest in new equipment, products or processes.

KPMG analysed more than 1000 Scottish companies and highlighted the high risk of contagion for lenders exposed to the worst-affected industries.

The group looked in detail at publicly traded accounts in Scotland, and found the highest concentration of zombie firms is in the education (29%), mining and extraction (26%), real estate (22%) and automotive (21%) sectors.

In education, it said ongoing pressures to balance books amidst falling international student numbers in the face of Brexit, coupled with other financial challenges, has resulted in a high concentration of zombie firms in the sector.

Despite a marked improvement in oil prices following the slump, the Scottish oil and gas sector has struggled with low levels of capital expenditure in North Sea projects. Along with significant cost and pricing pressures, this has made it difficult for the supply chain to mount a sustained recovery – as reflected by the high number of mining and extraction zombie firms.

In property, the firm highlighted reduced occupancy levels, declining rents and falling values in the retail sector as having a significant impact.

The automotive sector also gave cause for concern, with numbers of zombie firms being driven by car dealerships facing pressures from ongoing consumer uncertainty over Brexit, coupled with a move away from diesel, and restricted availability of new vehicles as a result of new emissions standards.

Blair Nimmo, head of restructuring at KPMG in the UK, said: “For the past decade, zombies have been allowed to sleepwalk largely undisturbed, thanks to an extraordinary monetary and political environment, coupled with lenders exhibiting greater creditor forbearance to struggling companies in their portfolios.

“The uncomfortable truth, however, is this environment is unlikely to persist indefinitely.

“In the event of a liquidity squeeze, many of these underperforming businesses would fail – and if this happens, the potential for contagion is very real, creating broader challenges for an economy already struggling to deal with a plethora of issues.

“The good news is that prognosis doesn’t have to be terminal – but, as with many things in life, acting sooner rather than later provides more options and can improve the chances of recovery.

“Urgent dialogue is required between regulators, banks and businesses in order to minimise the ongoing drag these companies have on the economy, and to mitigate against potential risks in the event of an economic downturn.”

Of the 21,000 private companies that KPMG analysed across the UK, 60% displayed one or more of the symptoms associated with zombies, while 8% showed three or more.

However, the company said that based on the latest data from 2018, and taking into account the recent increase in Bank of England interest rates, the share of zombie companies spanning the whole of UK could actually be as high as 14%.

KPMG’s chief economist in the UK, Yael Selfin, said: “The threat zombie companies pose to the wider economy is very real, regardless of what the post-Brexit environment looks like.

“Many unproductive businesses have been able to stumble on in recent times, generating just enough profits to continue trading but without the innovation, dynamism or investment necessary to sustain bottom-line growth.

“This has, and will continue to, create a drag on UK productivity, which continues to lag our peers in the G7 and much of Europe.

“If interest rates rise further, highly-leveraged businesses may soon find that borrowing will become more difficult to repay, and if the economy continues to stutter, these businesses will be left especially vulnerable to adverse market forces or a tightening of liquidity – as will the lenders they rely on.”