UPDATE 1-Australia Q2 construction data bodes well for growth

* Q2 construction spending stronger than expected

* Spending on engineering strong, jumps 5.7%

* Data positive for next week's second-quarter GDP

SYDNEY, Aug 26 - Australian construction work spending was much stronger than expected in the last quarter as investment on infrastructure projects jumped, boding well for growth in the economy as a whole.

Government data on Wednesday showed the value of construction work fell just 0.1 percent in the quarter to a seasonally adjusted A$ 35.03 billion, ($29.43 billion), handily beating forecasts of a 4.0 percent fall. Fourth-quarter data was revised upwards to show fall of 2.2 percent, from a drop of 3.7 percent.

The data showed weakness in residential and non-residential building investments, but that was offset by a strong 5.7 percent rebound in engineering work, such as on roads and mines.

And, for the first time, spending on engineering projects outstripped investment in housing and commercial building.

The data is a key building block for the second-quarter gross domestic product (GDP) report due on September 2 and the surprise result could mean there is an upside risk to analysts' forecasts.

"The unexpected rebound in engineering works in the second quarter points to a less weak-than-expected investment result for next week's GDP result, providing some upside to our forecast," said Scott Haslem, chief economist at UBS.

Australia dodged a technical recession in the first quarter, one of the few rich nations to do so. Earlier this month, the Reserve Bank of Australia (RBA) raised its growth forecasts, forecasting a GDP growth of 0.5 percent for all of 2009.

The RBA also dropped an easy monetary policy bias, and made clear rates could be expected to rise to normal levels over time. The cash rate is currently at a record low of 3 percent.

Financial markets <RBAWATCH> are fully pricing in a first 25 basis point rate rise in December, with a chance the RBA could move as early as November. The Aussie <AUD=> took Wednesday's data in its stride, holding broadly steady at around $0.8350.

ENGINEERING A RECOVERY

The construction sector accounts for about 15 percent of the entire economy. Spending on buildings fell 5.7 percent, with investment on residential activity dropping 2.6 percent.

Spending on non-residential projects like offices, hospitals and shopping malls slumped 9.5 percent as funds flowing into the commercial property sector dried up.

Yet spending on engineering projects rose 5.7 percent in the quarter, to be up a whopping 22.7 percent year-on-year.

It was led by robust investment in mining projects and private-public ventures to build roads, rails and ports. The public sector has also helped as state governments spent big on infrastructure.

"The strength (in engineering spending) was particularly notable in the private sector and was broad based across all states," said Paul Brennan, analyst at Citi.

"Overall, the construction data reinforce our view that GDP will show positive growth in the June quarter."

The amount for building in the pipeline also showed resilience. Work approved but yet to be started stood at A$10.07 billion, up from A$9.39 billion in the previous quarter.

And there was reason for optimism on engineering as well. The federal government on Wednesday approved a massive A$50 billion liquefied natural gas project off western Australia. [GORGON]

Adam Carr, senior economist at ICAP, said the data pointed to a stronger business investment outlook than earlier assumed.

"So then, I am feeling comfortable with my view that we won't see a massive slump in investment going forward. It is coming off, but not at a worrying pace," he said.