* Business investment up 1.1 pct in Q2, beats forecasts
* Spending on equipment still soft, and a drag on economy
* Outlook improves as non-mining firms upgrade investment plans
By Wayne Cole
SYDNEY, Aug 28 (Reuters) - Australian business investment was surprisingly strong last quarter, while an upgrade to spending plans for the year ahead leant hope the economy could weather a cooling of the once-booming mining sector.
Crucially, the report from the Australian Bureau of Statistics showed signs of life in investment outside mining, something the Reserve Bank of Australia (RBA) has been counting on to keep the economy on an even keel.
"Overall it's a positive result," said Michael Blythe, chief economist at Commonwealth Bank of Australia.
"There are two parts of the growth transition, a pick-up in residential construction, which has been confirmed..and a pick-up in the non-mining capex side of things, and that's where the big question mark was," he added. "These numbers today suggest prospects in that area are looking quite encouraging."
The ABS's latest survey of planned spending for 2014/15 came in at A$145.2 billion, up from a previous A$137 billion and topping analysts' estimates of around A$142 billion.
The biggest upgrade came for "other industries", a catch-all for sectors such as utilities, transport, retailing and finance, where spending plans were up over 12 percent on last year.
Investors assumed the improving outlook would reinforce the RBA's determination to keep interest rates steady for some time yet and took the Australian dollar to a three-week peak at $0.9374.
Q2 GROWTH NOT SO HOT
Thursday's figures showed investment rose by 1.1 percent in the second quarter to A$37.65 billion (35.2 billion), confounding forecasts of a 0.3 percent drop. Figures for the previous quarter were also revised higher.
All the improvement came in spending on building and structures which bounced by 2.0 percent, after a sharp fall in the first quarter.
However, spending on plant and equipment fell by 0.9 percent, a disappointing development as it will drag on economic growth in the quarter.
That came on top of a surprisingly sharp 1.2 percent drop in construction work for the quarter as an ongoing pullback in engineering spending overshadowed strength in home building.
Government investment also proved soft, despite Prime Minister Tony Abbott's oft-stated ambitions to be know as the "infrastructure PM".
The official report on gross domestic product (GDP) is due on Sept. 3 and all the signs are it will show a marked slowdown from the first quarter's surprisingly brisk 1.1 percent increase.
"We're tracking a flat outcome, so zero for GDP," said Tom Kennedy, an economist at JPMorgan.
"All-in-all it's still a very soft outcome for Q2, but we did have a bit of a strong rise in the first quarter so a little bit of payback is key to our view there." (Reporting by Wayne Cole; Editing by Eric Meijer)