Britain's economy is picking up at last but the country has a problem it didn't face after previous recessions and which even now remains hard to detect: the corporate undead.
Thousands of companies have subsisted through the downturn thanks largely to accommodating bankers and very low interest rates. As the economy gathers pace, some will recover and flourish, but the weakest of these "zombie firms" will find that competition and a shortage of cash spells the end.
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More than a million people are employed by businesses showing signs of acute distress, according to the Association of Business Recovery Professionals, R3.
If recovery does kill off the weakest, that may mean unemployment gets worse before it gets better, which in turn may be a cue for the Bank of England to keep interest rates lower for longer, casting its forward guidance in a new light.
"A growth in activity means a growth in competition - demand for working capital - and those that can't keep pace potentially fall behind or over-extend themselves," said Lee Manning, a partner at accountants Deloitte.
The "zombie" phenomenon emerged in the 1980s and 1990s when U.S. savings and loan associations and Japanese banks staggered on thanks to cheap money.
In the UK now, "zombie" firms are commonly defined as loss-makers which, helped by low borrowing costs, can only service their debts. Cash is so tight, even a slow month in the holiday season can finish them off. Where past "zombies" have been mainly in financial sectors, experts say Britain's are widely spread, including service companies, manufacturers, builders and retailers squeezed by recession and online shopping.
To prove this, insolvency experts refer to company failures. These jumped in the months after the financial crisis began, then fell sharply in 2009 as the BoE kept shaving rates.
Now as demand is picking up, so are insolvencies: In the second quarter they ran at about 4,000 a month, says Britain's Insolvency Service. That was still behind their average rate in 2009-12 but higher than in the first quarter of 2013.
"I'm sure in some cases we have kept companies alive for too long," a senior executive at a leading UK bank told Reuters. "You've got to be mindful that we saw it as nursing companies back to financial health and getting a better bank as a result."
'ZOMBIE' LIABILITIES AT 1 PERCENT OF GDP?
So how many 'undead' businesses are there?
R3's estimates are based on surveys of business owners. It says the "zombie count" - firms able to pay only the interest on their debt - has declined to just over 100,000 from a peak around 160,000 in November 2012.
But it says more than 200,000 UK companies - nearly 8 percent of the total - are in acute distress, either negotiating with creditors or struggling to pay due debts.
R3 estimates that at least 497,000 people are employed by "zombie businesses", and 1.3 million by acutely distressed ones. That adds up to about 4.4 percent of the British workforce.
"Businesses with such serious cashflow problems may find that the day of reckoning is not too far off," wrote R3 president Liz Bingham in a June report.
Another assessment, from corporate watchdog Company Watch, quantifies the risky debts on companies' balance sheets.
At Reuters' request, the group analyzed the accounts of all companies registered in Britain and identified more than 227,000 that are in negative equity - a technical measure of insolvency which is the business equivalent of homeowners whose mortgage debt is bigger than the value of their property.
Company Watch found these companies in the UK have a combined negative worth of just under 70 billion pounds ($110 billion). Business services, construction and media are the areas with the heaviest liabilities, according to the analysis.
Many of the firms will have shareholders who are ready to support them, but Company Watch economic models predict that, over the next three years, around a quarter will be unable to repay their debt. That is equivalent to a liability of 17 billion pounds, equal to about 1 percent of annual GDP.
"The risk is that there will be a flood of ... corporate failures which could escalate insolvency numbers dramatically," said Nick Hood, head of external affairs at Company Watch.
Recovery is risky for cash-poor firms because orders rise, suppliers put up prices and rivals cut theirs to win market share. Companies whose cash is already absorbed by interest payments have little room for maneuver to fulfill extra orders.
"A zombie often cannot take advantage of an improving economy," said Phil Pierce, a Leeds-based partner at insolvency specialists FRP Advisory. "As the economy improves and the company's turnover grows, so too does its need for available working capital to fulfill orders and cash flow is squeezed."
JOBS IN THE BALANCE
Guessing the firms' potential failure rate is little more than a stab in the dark: Many will be lifted by the recovering economy, and people who lose jobs at one company may find work with another.
But if the jobs were to be lost at the same rate as Company Watch expects the debts to turn bad, then up to one-quarter of the total would be at risk. That's 124,000-325,000 jobs, or potentially as much as 1 percent of those currently in work.
Under new governor Mark Carney, the BoE has pledged to keep rates at their record low of 0.5 percent while joblessness - at 7.7 percent and declining - exceeds 7 percent. Carney has said "a great many" jobs - over a million in the private sector - need to be created to bring unemployment down to 7 percent over three years, and rates may stay low even then.
If insolvencies speed up to the point where they outpace new businesses, such job creation may be harder. The Bank declined to comment for this article.
Whether or not recovery forces zombie firms to close, the problem highlights the hard choices facing policymakers. The central bank's ultra-easy money has helped reduce insolvencies, protecting jobs in viable companies during hard times. Yet it also propped up firms that are now holding back the 'creative destruction' which some think underpins free-market capitalism.
"There are a lot of companies taking up hospital beds... Where you get more insolvencies you will probably find that it is better for the survivors, but there will be higher unemployment," said Russell Cash, an insolvency expert at FRP Advisory.
($1 = 0.6324 British pounds)
(Additional reporting by Olesya Dmitracova and Matt Scuffham in London; Editing by John Stonestreet)