September 21, 2014 / 6:40 AM / 3 years ago

New Zealand PM storms to third term but faces slowing growth ahead

WELLINGTON (Reuters) - Prime Minister John Key secured New Zealand’s first majority government in almost 20 years on a promise to maintain a strong economy, but slowing growth in China may challenge his outlook and also threaten fiscal discipline.

New Zealand's National Party leader and Prime Minister-elect John Key celebrates a landslide victory with his wife Bronagh (R) and son Max (L) at the National election party during New Zealand's general election in Auckland, September 20, 2014. REUTERS/Nigel Marple

Key’s center-right National party stormed to a third straight term in general elections on Saturday after promising to stay on the path of economic growth and fiscal prudence, despite one of the roughest campaigns in recent years.

National steered New Zealand’s economy back to growth after the global financial crisis, with rising immigration and building projects in the largest city, Auckland, and in the earthquake-hit Canterbury region also boosting demand and investment. Dairy exports, which account for a quarter of all goods New Zealand sells overseas, have also soared.

New Zealand’s relatively small economy has outperformed many of those in developed countries, with data in the past few days showing growth at an annualized 3.9 percent in the second quarter, its fastest pace in a decade.

The government and economists expect growth to moderate in the coming years as New Zealand feels the impact of rising interest rates and an historically strong domestic currency. A slump in global prices for dairy products is seen knocking the terms of trade from a 40-year high.

Slowing growth in major trading partner China could also sting the New Zealand economy if it curbs demand for agricultural exports, economists say.

“It’s still not clear how much the Chinese economy is slowing ... China is an issue for New Zealand because they’re our largest trading partner and impact our commodity prices,” said Darren Gibbs, chief economist at Deutsche Bank New Zealand.

The government has pledged to maintain the status quo on economic policy, but Gibbs said Key’s plan to balance the books from next year onwards could be challenged by external factors, along with rising incomes.

“National is pretty committed to achieving a surplus, but it will be very difficult to build extra surpluses. As the labor market tightens, pressure is going to build to pay public servants more,” he said.

In August, Key’s government trimmed its growth forecast to 3.8 percent for the year to March 2015 from 4 percent in its May budget, while it also cut the budget surplus forecast for each year through to 2018 by NZ$500 million.

Key also enjoys enormous personal popularity ratings and survived a sometimes rough-and-tumble campaign to secure an outright majority for the first time since New Zealand adopted its German-style proportional voting system in 1996.

New Zealand’s strong economic performance meant voters overlooked allegations of dirty politics, and reports that Key’s government had planned mass domestic surveillance.

“It was the most astonishing election campaign in living memory, but none of the issues that came up could really trump the economy in the end,” political scientist Bryce Edwards said.

Key is a former currency trader with an estimated wealth of around NZ$50 million ($41 million) but Edwards said Key’s easy-going personal style helped him connect with ordinary voters.

“He doesn’t look and sound like a member of the establishment,” Edwards said. “He looks and sounds like someone at the rugby club down the road.”

Reporting by Naomi Tajitsu; Editing by Paul Tait

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