The Toronto Stock Exchange (TSX), Canada’s main index, is at record levels, outperforming both the S&P 500 and Nasdaq in 2025. However, the record run comes at a time when the Canadian economy is doing poorly and is, by all accounts, headed for a recession.
Why Is the TSX Doing Well When the Canadian Economy Isn’t?
The fact is that Canada’s economy is stagnant, and the job market is losing speed. This comes at a time when the U.S. is hitting the country with unprecedented tariffs.
On the national level, the Canadian economy lost 40,000 jobs between June and July and 66,000 in August. Manufacturing and construction, two sectors being hurt by tariffs, were among the industries that posted the biggest job losses in 2025.
On an annual basis, the unemployment rate climbed from 6.9% in July to 7.1% in August; that’s up from 5.7% just 18 months ago. A reading of 7.1% translates into 1.6 million Canadians out of work.
If you take the pandemic out of the equation, the current unemployment rate is the highest in almost a decade.
This economic fallout, which includes big job losses, especially in manufacturing and transportation, is pretty much what economists predicted would happen during a trade war with our biggest economic partner.
And yet, despite the bad numbers, the TSX continues to hit record highs. As of this September 15 writing, the index is up approximately 19% year to date and a whopping 25% on an annual basis. A record-setting TSX and bleak Canadian economy do not, generally, go hand in hand.
Is the Bank of Canada Expected to Lower Interest Rates?
In some ways, the TSX is at record levels because the Canadian economy is performing poorly, not in spite of it. A weak job market has virtually cemented an interest rate cut when the Bank of Canada meets next on September 17.
Before the weak jobs data came out, money markets had the odds of an interest rate cut at 72%. After the August data came out, the odds jumped to 92%. After holding interest rates at 2.75% for three consecutive meetings, the central bank is expected to cut interest rates by 25 basis points to 2.5%. This could be followed up by another 25 basis point interest rate cut when it meets again in October, bringing the policy rate to 2.25%.
Within an idling economy, lower interest rates could help stimulate personal and business spending. And that could go a long way to either shortening the length of a recession or perhaps helping avoid one altogether.
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