Persistently low interest rates are cutting productivity and creating so-called zombie firms, the Swiss-based central bank of central banks has warned.
The Bank for International Settlements (BIS) is owned by its 60-member central banks and facilitates transactions between them. It also provides research and policy analysis to help promote financial stability.
In its latest research, the BIS attempted to tackle the vexed question of why most advanced economies and many developing economies have been plagued with historically low productivity growth over recent years.
One possible answer, argued the bank, is the low interest rates that led to the global financial crisis, and the even lower interest rates since in an attempt to halt economic declines and restart growth.
The head of its monetary and economic department, Claudio Borio, said there are two reasons who low interest rates might hurt productivity.
The first is the type of firms they encourage to expand during an economic upswing.
"Credit booms tend to undermine productivity growth as they occur," he said in a speech to a conference on weak producivity being jointly hosted by the BIS, International Monetary Fund (IMF) and Organisation for Economic Cooperation and Development (OECD).
"The key mechanism is the credit boom's impact on labour shifts towards lower productivity growth sectors, notably a temporarily bloated construction sector."
The damage to productivity becomes even more severe if that credit boom turns into a bust, doubling to about half-a-percentage-point per annum.
"The overall effects can be sizeable. Taking, say, a (synthetic) five-year credit boom and five post-crisis years together, the cumulative shortfall in productivity growth would amount to some 6 percentage points," Mr Borio said.
"A reasonable conjecture is that sectors that have expanded too much during the boom have to contract at some later stage — this is what allows us to talk about 'misallocations' in the first place as opposed to mere reallocations." Low rates creating, sustaining 'zombies'
The second mechanism by which very low interest rates might be hurting productivity is through creating and sustaining so-called "zombie firms".
These are persistently unprofitable companies that are essentially being kept afloat by the generosity of their bankers who keep extending credit to them.
Mr Borio said his research team had observed a clear correlation between low rates and zombie companies.
"The first point to note is that zombies have been on the rise and survive — if I can use that term — for longer," he said.
"Furthermore, zombies remain in that state for longer. For instance, based on the narrower definition, in 1987 the probability of a zombie firm remaining a zombie in the following year was approximately 40 per cent; by 2016 it had risen to 65 per cent."
The causation is that low rates allow many of these companies to survive their heavy debt burdens for longer and also reduce the incentive for banks to pull the plug and call in their loans, because the returns by lending out that money elsewhere would not be much higher.
Mr Borio said this, in turn, means that many more profitable and efficienct companies may be missing out on getting loans.
"The counterpart to this ability to avoid reducing debt, is that zombie firms have been locking in more resources, hindering the reallocation process," he explained.
"Relative to their more profitable peers, they have slowed down asset disposals and refrained from cutting capital expenditure." Why care about low productivity?
Nobel Prize winning economist Paul Krugman famously said that "producivity isn't everything but, in the long run, it is almost everything".
Productivity is one of the most important determinants of economic growth, especially per capita economic growth and thus income growth.
This is an area where many economies, including Australia, have been struggling.
Australia has been papering over the cracks of low productivity and weak per capita income growth by running a large immigration program that boosts the population and the potential size of the economic pie, even while each individual gets a smaller slice of it.
Most economists agree that, in the long run, productivity increases through new technology and smarter, more efficient ways of working in higher value industries are the only way to sustain and improve standards of living.
This means that, while record low interest rates immediately after the global financial crisis may have saved the world from a global depression, a near-decade of low rates might also have stunted a sustainable economic recovery.
It also means that, if Australia's economy continues to dawdle as it has over recent years, another interest rate cut may not be the answer to boosting growth and may even make the problems worse.
