WELLINGTON (Reuters) - New Zealand markets rallied on Monday after Prime Minister John Key secured the country'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.
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.
Financial markets cheered the results in early Monday trade, pushing shares near a record high on anticipation the government would retain many of its business-friendly policies.
"The result highlights the benefits that an incumbent government can enjoy when its domestic economy records significant outperformance relative to the global growth backdrop," JPMorgan analysts said in a note.
The benchmark NZX50 index .NZ50 jumped 1.3 percent to an intraday high of 5,257.99, while the yield on 10-year bonds NZ10YT=RR fell to 4.275 percent, retreating from a two-month high. The New Zealand dollar NZD=D4 edged up slightly.
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 make up a quarter of all goods New Zealand sells overseas, have also soared.
New Zealand's small economy has outperformed many of those in developed countries, with recent data showing second-quarter growth of an annualized 3.9 percent, its fastest in a decade.
The government and economists expect growth to moderate in the next few years as New Zealand feels the impact of rising interest rates and a 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 stick to current 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 accusations 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.
Reporting by Naomi Tajitsu; Editing by Clarence Fernandez