* Bodes well for strong Q2 GDP growth, supports RBA
optimism

By Wayne Cole

SYDNEY, Aug 25 (Reuters) - Australian construction spending
rose a strong 3.5 percent last quarter as private work on homes
and engineering projects took over from government stimulus,
likely making a healthy contribution to economic growth.

The value of construction work done amounted to a record
A$41.7 billion ($37 billion) in inflation-adjusted dollars,
government data showed on Wednesday. The increase beat market
forecasts and came on top of an upwardly revised rise of 4.5
percent in the first quarter.

The strength supports the Reserve Bank of Australia's (RBA)
optimism that the domestic economy can grow briskly even as
doubts grow about the United States and Europe.

"These were good numbers, with housing kicking in and the
private sector taking over the running from the government,"
said Brian Redican, a senior economist at Macquarie.

Total construction spending by the private sector climbed
4.9 percent in the second quarter, while government spending
eked out a 0.4 percent gain.

"It also bodes well for a strong GDP (gross domestic
product) outcome," said Redican. "Growth could even reach 1.5
percent for the quarter."

The GDP report for the second quarter is due next week and
analysts had already been hoping for an increase of 1 percent
or more, lifting growth for the year to over 3 percent.
Construction accounts for around 16 percent of the country's
annual A$1.2 trillion in GDP and the extra spending last
quarter could add around 0.5 percentage points to growth.

That will please the RBA which has been counting on a
revival in private investment, particularly in mining, to fill
the gap left as monetary and fiscal stimulus is withdrawn.

Just last week, RBA deputy governor Ric Battellino
reiterated the central bank's upbeat outlook for the economy
and highlighted inflation as a bigger risk than a global
slowdown.

That is one reason many economists still think the RBA
could lift interest rates again by Christmas, having already
led the developed world by hiking 150 basis points to 4.5
percent.

Investors, however, seem mesmerised by the danger of a
double-dip recession in the United States and are pricing in a
one-in-three chance that rates would be cut by year-end
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BANKING ON MINING

The pick-up in business spending owes much to the booming
mining and energy industries, which are investing heavily to
meet voracious demand for resources from China and India.

That demand has led to huge price increases for iron ore
and coal, Australia's two biggest exports, and was a major
reason that around A$150 billion of mining projects were under
consideration at the start of this year.

The Gorgon liquefied gas project alone is worth A$43
billion over four years and helped double the pipeline of
private infrastructure projects to around A$71 billion. Work on
Gorgon began late last year and analysts estimate it could
amount to around A$10 billion in the year ahead.

Figures for private-sector investment in the second quarter
are due on Thursday and analysts generally expect a solid
increase in spending and an upgrade to spending plans.

Mining investment is already equal to around 4.25 percent
of GDP, from a past average of 1.75 percent, and a huge
pipeline of projects suggests it should rise further yet.
Wednesday's construction numbers showed work in the pipeline
for building alone stood at A$55.7 billion.
"While the global economic outlook has clearly started to look
a bit grimmer over the past few weeks, if we continue to see
the private sector recover as we expect, then the RBA is
unlikely to validate any market pricing for a lower cash rate,"
said Scott Haslem, chief economist at UBS.

(Editing by Mark Bendeich)