The Impact of Unemployment, Inflation, and the Exchange Rate on Economic Growth in South Africa (1994–2022)

Abstract

ABSTRACT South Africa's macroeconomic environment continues to be shaped by persistent structural imbalances, including high unemployment, inflationary pressures, and exchange rate fluctuations, all of which have important implications for the country's long‐term economic performance. This study investigates the dynamic relationship between economic growth, unemployment, inflation, and the exchange rate over the period 1994–2022, employing the Autoregressive Distributed Lag (ARDL) approach with unit root tests and bounds testing for cointegration, Granger causality analysis, and a set of robustness checks, including FMOLS and DOLS estimations. Annual data sourced from the World Bank, Statistics South Africa and the South African Reserve Bank were used to estimate both the short‐run and long‐run effects. The ARDL bounds test confirmed a long‐run cointegrating relationship among the variables. Long‐run estimates revealed that unemployment and inflation significantly reduce economic growth, while the exchange rate exerts a positive but modest long‐run effect. In the short run, inflation and the exchange rate significantly influence growth, whereas unemployment does not, reflecting the structural rigidity of the labor market. Granger causality tests revealed unidirectional causality from GDP to unemployment. The study highlights the multidimensional drivers of South Africa's growth dynamics and underscores the need for coordinated macroeconomic strategies that address labor market inefficiencies, stabilize price levels, and strengthen external competitiveness to support sustainable long‐term growth.