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Mike Moffatt is an assistant professor at the Ivey Business School at Western University and senior director at the Smart Prosperity Institute. John McNally is a research associate at Smart Prosperity.

Canada has lost three million jobs since the beginning of the COVID-19 crisis, with most of those layoffs happening during the current lockdown. While there is optimism the economy will quickly bounce back once restrictions are lifted, there is a chance the worst is yet to come.

When dealing with the coronavirus, policy discussions have focused mostly on either weathering the short-term crisis or investing in the long-term recovery. However, the hardest problems that COVID-19 brings in the coming months will occur in the space between the two.

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Governments have been calling this in-between phase “the restart.” That implies getting back to normal is like flipping a switch. It isn’t. Public-health restrictions will remain until we have an available vaccine. Businesses will have to adapt to a new normal, where growth and recovery are held back by the limits needed to prevent returning to lockdown. This process will swing between peaks and valleys, with steps backward and forward, taking several years.

Welcome to the climb: an extended period of ascents and descents before starting a recovery. No one knows how long this climb will last, or how slowly restrictions will lift. There are too many public-health variables. But we do know the economic impacts could be devastating. The trend line we will see in the next two years will look like a jagged mountain range. Policymakers need to start thinking today about what paths we will need to take to ensure this trek toward a recovery actually leads there.

The biggest risks during the climb will vary for each business. Large companies with problematically high debt levels will be more vulnerable. New debt on balance sheets will also make it harder to borrow and will dent credit ratings. That will slow investment and hiring. Those impacts will ripple through supply chains.

For small and medium-sized businesses, the threat is lower profits. Less money means less rehiring and, in relative terms, more expensive fixed costs. The lifting of restrictions also limits a business’ ability to claim losses against their insurance. If a business operating at 50-per-cent to 70-per-cent capacity – such as a restaurant – is forced to incur months of losses, it will have to close.

This will not stop the forces of creative destruction. E-commerce now makes up 27 per cent of total retail sales in the United States after sitting at 16 per cent only eight weeks ago. Consumers and markets are adapting fast. Some of these changes won’t be reversed when this is over. This will hit sectors such as commercial real estate, services and entertainment especially hard, deepening their pain.

This climb will also make predictions about everyone returning to work look too optimistic. One U.S. estimate notes four out of 10 jobs lost in the pandemic likely won’t return. Even if furloughed employees return immediately, earnings crunches during the climb will mean fewer staff hours are required, and companies will hire less or let people go. The newly unemployed may not have the skills needed to fill opportunities in growing sectors.

These forces show that the biggest danger in the climb is that balance sheets decay to the point of closure or default. If weeks turn to months or years, the losses will add up and begin to cascade throughout industries. This will, without further government action, create a hole so deep that the chance to invest in a better future once COVID-19 is over will disappear.

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Governments need to start thinking now about how to prevent this. Job-creation programs, paid skills training for career changes, and issuing grants to companies may be expensive, but they are cheaper than a long-term depression. Policies will be needed to protect workers without stifling market forces. That will take the same creativity and decisiveness that governments have shown in supporting people through the lockdowns.

This short-term fight against the virus is over, but the trek toward normal is just beginning. If governments don’t act to ensure we come out the other side in good shape, we won’t have a chance at a better future. We need to prepare for the climb – it’s going to be rough.

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