Executives are busy, which is why short articles that make one important point are appealing. This article has been written in that spirit.

The point is that executives should be very wary of the view that because the economy is recovering, good times are here again. The point is important because running your business as if pre-recession days are back is likely to lead to serious regret.

The reality is that the road back to normal from arguably the worst economy since the Great Depression is going to be a long slog with plenty of fits and starts. Every so often one word describes a situation perfectly. “Slog” is it for this recovery. Something is a slog when it is slow, tough and exhausting. I am not the first to apply the word to current economic circumstances and I will not be the last.

The reason why executives should be betting on a slog is a straightforward one. First, the mess of the last 18 months has been a generation in the making, a consequence of huge and protracted saving and spending imbalances at the global level, too much liquidity and too low interest rates for too long in too many countries, bubbles in financial and property markets, spectacular debt growth, and a whirlwind of financial claims like credit default swaps and collateral debt obligations that too often did not deliver as advertised.

It is folly to think that after 18 months of cleansing, it is all behind us. It will not take nearly as long to get out of this as it took to get into it, but it is going to take a lot more than 18 months.

Second, about a quarter of our economy consists of exports to the United States. The history of this reality tells a powerful story: The Canadian economy goes wherever the U.S. economy goes. That relationship is gradually weakening, as we benefit from growing demand for our commodities from emerging countries like China. Nevertheless, the old storyline still dominates our prospects.

The U.S. is in for an even worse slog than we are, with the primary culprit being the U.S. consumer. Responsible for 70 percent of the U.S. economy, the U.S. consumer is clearly the key to a U.S. recovery. The trouble is that the U.S. consumer is in no shape to be the key to anything. How do you drive a recovery when you are over your head in debt, afraid of losing your job, working fewer hours, effectively seeing no pay increases, unable to get reasonably priced credit, are out of savings, have taken the biggest hit to your portfolio and housing wealth in your lifetime, and are possibly looking at rising taxes? Faced with this cocktail of woes, the U.S. consumer is seeking peace of mind in dramatically increased savings, a sensible strategy in itself, but a terrible one for job-creating spending and economic growth in the short term.

The U.S. consumer for now is a problem, not a solution, and a problem that only time can fix. We should not be holding our breath waiting for the U.S. to right our economy.

Third, over the next few quarters the economy is likely to be much stronger than was anticipated even a few months ago. This is a direct consequence of monetary and fiscal stimulus that exceeds anything in our peacetime history. The Bank of Canada has driven interest rates to record lows, enormous and seemingly endless infrastructure spending is being injected into the economy, and government deficits are exploding.

Canada, of course, is not alone on the big stimulus policy track, and it certainly is justified. But it borrows growth from the future and at some point, if the stimulus is not removed inflation will loom. Exiting from record stimulus ahead of inflation will be a high-wire act that carries a significant risk of injuring a fragile economy. This is a big part of why the sustainability of this recovery is such a question mark.

Fourth, spreads in interbank lending markets that are critical to the flow of credit have improved enormously, at considerable benefit to the economy. This is partly because confidence is improving, but it is also because of assorted government support initiatives and guarantees. The removal of these must occur at some point. This will test the credit markets and, by extension, the recovery.

Fifth, Canada is one of the world’s great trading nations, accounting for half of one percent of the world’s population and well over two percent of the world’s exports. Healthy world trade is a must for us. World trade is coming back from the depths of the global recession, but it has a long and uncertain way to go. Our economy will not be truly out of the woods until world trade returns to pre-recession levels.

Finally, there is still too much debt on consumer, homeowner, business and government balance sheets, here in Canada and around the world. The deleveraging is not close to being over. As those who owe too much start paying back to get out from under, asset prices are driven down and spending that used to occur simply stops. Both actions slow recoveries.

Things are surely looking better than our recent past. But sustained, robust expansion with good forward visibility is unlikely for some time. The good news is that many of the economic and financial statistics that matter are either heading in the right direction or at least are not going the wrong way as fast as they were. That is a big first step and it should not be minimized.

For executives, the strategy is clear: control spending, both operating and capital; do not let the recovering economy lull you into paying too much for assets; understand and manage risk; take care of valued customers, employees and suppliers; keep the product shelf competitive; manage the balance sheet prudently. Developing and implementing such a strategy is hardly rocket science, but it does have a long history of having worked.

The beginning of a recovery after a deep downturn is fertile ground for executive blunder. It is too soon for executives to get exuberant. Leo Tolstoy in War and Peace offers insight. “The strongest of all warriors are these two – Time and Patience.” Good advice.

About the Author

John S. McCallum is Professor of Finance at the I. H. Asper School of Business, University of Manitoba, and former Chairman of Manitoba Hydro. Contact