UPDATE 1-Australia construction work flat, home building shows some life

Tue Feb 26, 2013 9:20pm EST

(Adds analyst reaction, detail)

* Construction spending dips in Q4, after upward revision

* Pick up in building work suggests lower rates slowly working

* Puts focus on key business investment figures due Thursday

By Wayne Cole

SYDNEY, Feb 27 (Reuters) - Australian construction spending was flat last quarter as engineering work came off record highs, though a pick-up in home and commercial building could be a sign that lower interest rates are starting to feed through.

Wednesday's figures from the Australian Bureau of Statistics showed construction spending dipped 0.1 percent in the fourth quarter of last year to A$51.8 billion, following an upwardly revised 1.9 percent increase the previous quarter.

Yet spending on home building rose 1.7 percent and work on commercial building, from shopping centres to hospitals, increased by 2 percent.

"The detail is arguably more positive than the headline suggests," say analysts at Westpac.

"The better-than-expected upturn in building - residential activity in particular - suggests the required 'rebalancing' in growth drivers towards interest sensitive sectors may be proceeding better and earlier than expected."

The Reserve Bank of Australia (RBA) cut rates by 125 basis points last year in large part to breathe life into the dormant housing market so that it could help take up the slack when mining eventually cools.

The importance of mining was clear in spending on engineering, ranging from mines to ports and railways. While that dipped 1.3 percent in the fourth quarter it followed a string of very strong gains and spending was still up almost 20 percent on the same quarter of 2011.

The data were an appetizer for a crucial report on business investment due Thursday, which could yet decide whether the RBA cuts rates further at its March policy meeting next week or holds off for another month.

Investors are pricing in only around a one-in-four chance <0#YIB:> of a cut at the RBA's meeting on March 5, but that could change of investment proves much weaker than expected.

In particular, any further pullback in future spending plans by firms would argue for further monetary stimulus to cushion the non-mining economy and offset the drag from a stubbornly high Australian dollar.

Analysts generally estimate business investment rose 1 percent overall last quarter, though this is a volatile series and the range of forecasts is very wide.

The report will also include forecasts for spending for the fiscal year to end June and a first guess for 2013/14.

The figures will be a key input into gross domestic product (GDP) for the fourth quarter, figures for which are due next week.

Analysts are hopeful the economy could have expanded by around 0.8 percent in the quarter, in part driven by rising export volumes, which would keep growth for the year at a healthy 3.2 percent. (Editing by Eric Meijer)

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