A quote from British Journalist, Daniel Hannan states “You cannot spend your way out of a

recession or borrow your way out of debt.” A recession occurs when the volume of output and
employment in the economy has fallen resulting in a decrease in the level of income and
depressed living standards. A recession is a stage in the business cycle; is the fluctuation in
economic activity that an economy experiences over a period of time. Along with recession there
is Expansion, Prosperity and Contraction. These stages are characterized by the macroeconomics
scenario in the economy, which broadly covers the employment, output, growth, investment and
consumer demand. With expansion in the higher stage there is high levels of employment,
generation of income, growth and investments along with high consumer demand and spending.
This stage is also known as a boom. But as the consumer spending decreases owing to the
decreasing level of income or rise in prices, or increase in unemployment the consumer demand
decreases also with a fall in growth. If the recession continues for a prolong period of time there
will be economic failures deflation, increase in unemployment and no capital formation
including economic collapse. The economy of Trinidad and Tobago has been over the year
filtering such motions throughout and therefore is in the state of a recession. The challenges that
the economy of Trinidad and Tobago may face in recovering from a period of recession are: Low
Consumer Confidence, Effective and Ineffectiveness of Polices, Lack of Economic
Diversification, Loss of Investor Belief and Culture of Dependency on Government Imports.

Firstly, there is a low consumer confidence as there will be rising unemployment. This will
cause a rise in the savings ratio; the ratio of personal savings to disposable income in an
economy. In other words, people will spend less of their disposable income and save more
leading to a bigger fall in aggregate demand. If consumer confidence remains very low for a long
time then it will be difficult for the government to increase aggregate demand. In circumstances
where the government could cut income taxes this would increase disposable income, but if
confidence was low people would not be willing to spend any extra and the economy would
remain in a recession. The unemployment rate for Trinidad and Tobago has declined to four per
cent in the third quarter of 2016 from 4.4 per cent in the second quarter, according to the Central
Statistical Office’s (CSO) Labour Force Survey. With less of disposable income this poses a
huge challenge since now there is an even lesser consumer confidence. Hence it is a major
challenge to the economy recovering from the recession.

Secondly, ineffectiveness of monetary policies, lower interest rates reduces the cost of
borrowing and therefore people should be more willing to spend and invest. However, monetary
policy could be ineffective since firms may be reluctant to invest, even though it is cheap to
borrow because they cannot see any increase in demand. In terms of fiscal policies, Keynesians
argue that expansionary fiscal policy can be used to increase aggregate demand and get the
economy out of a recession. However, there may be many problems such as there will be time
lags because it takes time for the government to change its spending plans and once implemented
it will take time for this spending plan to actually increase aggregate demand. Also increasing
aggregate demand may cause the crowding out effect which if the government implements
expansionary fiscal policy by reducing taxation or by increasing government spending then this
will lead to a budget deficit and to finance this the government will have to borrow from the
World Bank with higher interests instead of making improvements such as building bridges or
schools, which adds upward pressure on the rate of interest as the government competes for
limited funds with the private sector. As the rate of interest goes up, private investment and
consumption are discouraged and results to a decline in aggregate expenditure. However,
Keynesians reject this argument saying that the government will only be using previously
unemployed resources therefore there will be no crowding out.

Thirdly, Lack of Economic Diversification, since Trinidad and Tobago’s economy drives
mainly from its oil and gas imports, there is an overdependence on the petroleum sector and if it
were to have a decline, it would have an adverse effect on the price and output. As such the
economy needs to sources other types of resources and not create this lack of diversification
which will equally cause the economy to fail into a recession. Lower returns from the energy
sector due to weaker prices and a drop in production weighed down Trinidad and Tobago’s
economy in 2016, though stronger prospects for the industry in the new year should fuel a
rebound in 2017. The T&T economy remained in recession for the second year in a row, with the
Central Statistical Office (CSO) estimating that GDP would fall by 2.3% in 2016, following a
contraction of 0.6% the previous year. With hydrocarbons accounting for 39% of state fiscal
income and 83% of export values over the 15 years through to 2015, according to the Central
Bank of T&T (CBTT), much of the recessionary pressure has come from low global energy
prices. The average price of Trinidad and Tobago crude fell from $48 per barrel in 2015 to
$44.90 last year, while oil and gas production has also decreased, bringing total revenue to an
estimated TT$37bn ($5.5bn) – well down on a peak of TT$57bn ($8.5bn) recorded in 2014. With
a decline like this in the oil and gas sector pushes the question to diversify other sources to
overcome the recovery of the recession.

Next, Loss of Investor Belief, as Trinidad and Tobago’s economy is filtering through a
recession with a decrease in its foreign exchange with much speculation of a continued recession
will influence local and foreign investors to not finance any projects etc. This is linked to an
economic theory by Noble Prize winner, Robert Lucas which states, “When making decisions,
individual agents will base their decisions on the best information available and learn from past
trends.” Rational expectations is the best guess for the future. Rational expectations suggests that
although people may be wrong some of the time, on average they will be correct. In particular,
rational expectations assumes that people learn from past mistakes. Rational expectations has
implications for economic policy. The impact of say expansionary fiscal policy will be different
if people change their behavior because they expect the policy to have a certain outcome. It goes
hand in hand with the economy and how their choices are affected.

Lastly, Culture of Dependency on Government Imports, as Trinidad and Tobago over the
years have a trend of demand foreign goods which are negatively affecting the economy as there
will be balance and gains of trade problems as well as balance of payment leading to a deficit
which will link to a recession, Therefore, the economy needs to stabilize and realize that
domestic products should be more frequently demanded. To lessen the recession and challenging
recovery.

In conclusion, for the past few years the economy of Trinidad and Tobago is suffering from a
recession with many challenges of recovering such as Low Consumer Confidence, Effective and
Ineffectiveness of Polices, Lack of Economic Diversification, Loss of Investor Belief and
Culture of Dependency on Government Imports. To recover from a recession there needs to be
either a rise in AD or a readjustment in prices and wages. Classical economists argue that a
recession will only be temporary because labor and product markets are flexible. However,
Keynesians argue that wage and price rigidity can keep the economy below full capacity for a
long time.