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OTTAWA (Reuters) - Canada's trade deficit came in at a much smaller than expected C$55 million ($50 million) in June, but analysts said the shrinkage reflected increased energy exports and that underlying trade weakness persisted and will eat into second-quarter gross domestic product figures.
Market operators had on average predicted Canada would run a trade deficit of C$800 million in June after the C$1.1 billion recorded in May.
Statistics Canada said on Wednesday that exports rose for the first time for four months in June, increasing by 2.3 percent to C$29.29 billion on the back of a 14 percent leap in shipments of energy products. Without the energy sector, overall exports would have fallen 0.5 percent.
"The trade sector is shaping up to be a drag on the pace of activity in the second quarter after two solid contributions in the prior six-month period," said Dawn Desjardins of RBC Economics.
"We expect a more moderate negative contribution from net trade in the second half of this year as both export and import demand revives."
In the second quarter, the volume of exports fell by an annualized 19.8 percent, while imports were down 4.8 percent on the same basis.
Adding to a picture of economic weakness, data showed that prices for new houses in June had the biggest year-on-year decline for almost 18 years.
The Bank of Canada last month predicted annualized GDP in the second quarter would fall by 3.5 percent before growing by 1.3 percent in the third quarter.
Although senior Canadian government officials have recently said there are signs the worst of the recession is over, they stress there are still problems ahead.
Exports to the United States, which in June comprised 73 percent of all Canadian exports, rose 5.1 percent on the back of higher crude petroleum shipments.
"With a decline in crude oil prices in July, we will likely not see as much strength in energy exports although the increase in U.S. demand is a positive development at this time," said Derek Holt of Scotia Capital.
Imports in June dropped 1.3 percent to C$29.34 billion -- the lowest level since the C$27.1 billion recorded in January 2004 -- on lower volumes of machinery, industrial goods and other consumer goods.
Canada's trade surplus with the United States rose to C$3.1 billion in June from C$1.71 billion in May.
The Canadian dollar rose slightly after the data was released and by 9:55 a.m. (1355 GMT) it was at C$1.0956 to the greenback, or 91.27 U.S. cents, up from C$1.1015 to the U.S. dollar, or 90.79 U.S. cents, at Tuesday's close.
The price of new homes in Canada fell by 0.2 percent in June from May, Statscan said, the ninth consecutive month-on-month drop. Prices fell by 3.3 percent from June 2008, the largest year-on-year decline since a 3.5 percent fall recorded in November 1991.
"While there is evidence that the existing home market may have stabilized, and is beginning to benefit from increased activity, the same cannot be said for the new home market," said Millan Mulraine, economics strategist at TD Securities.
Reporting by David Ljunggren; editing by Peter Galloway