Zombie firms face collapse amid economic pressure. The UK could see unemployment rise sharply in 2026.
Struggling “zombie” companies are beginning to fail under sustained cost pressures, according to new analysis from the Resolution Foundation.
In its new year outlook, the think tank warns that many businesses are facing a “triple whammy” of prolonged high interest rates, elevated energy costs, and successive increases to the minimum wage. For firms that have already been underperforming, these pressures may prove decisive.
The report suggests that 2026 could mark a turning point for the UK economy, following decades of weak productivity growth. Productivity, measured as output per hour worked, is crucial to enhancing wages and improving living standards. However, the Foundation cautions that any improvement may come at the cost of short-term disruption, including higher unemployment as less productive firms exit the market.
UK unemployment is already at its highest level outside the Covid period for a decade. The headline rate reached 5.1% in October, as many employers delayed hiring decisions ahead of Rachel Reeves’s Autumn Budget.
Business groups say higher taxes and rising wage costs are discouraging recruitment. Economists have long argued that so-called zombie firms have held back the economy by tying up labour and capital that could be used more productively elsewhere. Persistently low interest rates after the 2008 financial crisis allowed many heavily indebted businesses to survive despite weak performance.
Although the Bank of England has cut base rates six times since August 2023, operating costs remain well above pre-pandemic levels following 14 consecutive rate rises.
Separate research from the British Chambers of Commerce highlights the strain. Business confidence fell to a three-year low at the end of 2025, with tax and inflation cited as the most significant concerns. Fewer than half of firms expect turnover to rise in the year ahead, while investment plans continue to be scaled back.
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