Containers are ready for loading at a terminal in the port of Kiel, Germany. File/Reuters

German business morale slumped to a six-month low in January as a second wave of COVID-19 halted a recovery in Europe’s largest economy, which will stagnate in the first quarter, the Ifo economic institute said on Monday.

Ifo said its business climate index fell to 90.1 from an upwardly revised reading of 92.2 in December. A Reuters poll had forecast a January reading of 91.8.

Germany’s budget deficit is seen at 7 per cent this year when compared to gross domestic product, leading to a debt ratio of 72.5 per cent, the ministry said, as Berlin is spending billions of euros to cushion the economic blow of the pandemic.

“The second Corona wave has temporarily ended the recovery of the German economy,” Ifo President Clemens Fuest said in a statement.

Chancellor Angela Merkel and state leaders agreed last week to extend a lockdown until mid-February as Germany, once seen as a role model for fighting the pandemic, struggles with a second wave of infections.

Ifo economist Klaus Wohlrabe told Reuters the economy would stagnate in the first quarter of the year, adding: “The German economy is starting the year with little confidence.”

In a telling sign of corporate nervousness, Ifo’s expectations index fell to its lowest level since June, confounding expectations for a rise.

Unprecedented government rescue and stimulus measures helped lessen the shock of the pandemic in Germany last year, when the economy shrank by 5.0 per cent, less than expected and a smaller contraction than during the global financial crisis.

But the renewed lockdown measures are suppressing economic activity and confidence. Ifo’s index on current conditions fell to its lowest since September.

“Fear is back,” wrote ING economist Carsten Brzeski. “It will take more momentum in the vaccination schemes and a further reduction in the number of infections before the economy can take off again. It currently looks as if it will take at least until spring time before this will be the case.”

Highlighting the impact of the COVID-19 pandemic on German industry, carmaker Volkswagen said on Friday profit almost halved last year because of the pandemic, but a rebound in premium car sales in China and stronger deliveries in the fourth quarter helped keep it in the black.

The Federal Statistics Office will publish gross domestic product figures on Friday for the fourth quarter, when some lockdown measures had already been implemented. The statistics office said earlier this month growth probably stagnated in the fourth quarter.

The government expects the economy to grow by 3 per cent this year, a government official told Reuters on Friday, a sharp downward revision from last autumn’s estimate of 4.4 per cent caused by November’s imposition of a second coronavirus lockdown.

The German economy, Europe’s largest, will likely reach its pre-pandemic levels in mid-2022, according to a draft document prepared by the economy ministry and seen by Reuters on Monday.

The world economy’s situation, underutilised production capacities and early indicators suggest a further recovery of the German economy, the ministry said in its draft annual economic report.

A slowdown in eurozone business activity accelerated in January, making a new recession almost certain as the COVID-19 pandemic continues to batter the economy, a key survey showed on Friday.

The closely watched PMI index compiled by IHS Markit is considered the earliest indicator of the state of the economy and the latest reading confirmed fears that the year-old virus crisis is still going strong.