German business sentiment worsened in January, highlighting the challenges facing Europe’s largest economy as it emerges from a long slowdown in the industrial sector. The Ifo Institute said on Monday that its country sentiment indicator fell to 95.9 points in January from a reported 96.3 points in December 2019. However, analysts expected the meter to rise to 97 points.

The politicians hoped that an improved sentiment among companies would lead to a broader economic recovery in Germany and the Eurozone. Surveys released last week showed that factory production in the currency bloc and its largest economy is still shrinking, albeit at a slower pace.

According to Ifo analysts, production showed some signs of recovery early in the year and the service sector indicator dropped significantly. “The German economy begins the year with a cautious mood,” says Clemens Fuest, president of the Ifo Institute.

Last week, the European Central Bank expressed optimism about signs of stabilization amid easing global trade tensions and expanding fiscal policies. In Germany, government spending on infrastructure is near record highs, according to the Finance Minister Olaf Scholz. For the past six years, the country has adhered to the budget surplus policy.

In the past year, the German economy has been in serious difficulty, mainly due to the trade war between the US and China, which has slowed global economic growth. The country was even a step away from recession in the third quarter of 2019. However, at the end of the year, the industrial sector reported improvement.

Against this background, last week, US President Donald Trump threatened to impose 25% duties on imports of cars from the European Union if the bloc did not agree to a trade deal. If duties are imposed, Germany will be particularly hard hit as the automotive sector is a key part of the country’s industry.