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German firms most optimistic in 2.5 years

German business sentiment rose in January, beating analysts' expectations, according to the latest data from Germany's Ifo Institute for Economic Research.

The German business climate index rose to 110.6 in January versus a Reuters forecast for 110.0, the Munich-based research group reported on Monday. In December, the Ifo index had risen to 109.5.

Other data collected by the institution showed that German business expectations also rose to 108.9 in January, above the 107.4 recorded in December and again above expectations of a 108.0 figure from analysts polled by Reuters.

"The German economy made a promising start to the New Year. The Ifo Business Climate for industry and trade in Germany improved for the third time in succession,"Hans-Werner Sinn, president of the Ifo Institute said, although not all analysts were so confident.

(Read more: Euro zone businessactivity rises beyond expectations)

"German businesses remain die-hard optimists," Carsten Brzeski, a senior economist at ING said following the results. "The January Ifo just increased to the highest level since July 2011...[while] the small growth conundrum of the German economy continues."

"The growth performance throughout 2013 was much weaker than soft indicators had suggested. This dichotomy worsened towards the end of last year, which saw an unexpected disappointing growth performance despite a new acceleration of sentiment indicators," he said in a note on Monday.

Brzeski predicted, however, that strong fundamentals still make a "compelling case for a strong growth performance of the German economy this year."

"As long as [the] latest problems in emerging markets do not worsen, the German growth conundrum should automatically end in the coming months."

(Read more: Who pulled the trigger on emerging markets?)

Emerging markets and their currencies have been hit hard over the last few days amid fears over a tightening in U.S. monetary policy in the run up to this week's Federal Reserve policy meeting.

However, one lead analyst at Credit Suisse believed the data pointed to a recovery not only in Germany, but in the wider euro zone which has been blighted with negligible growth recently. "The Ifo corroborates our view that the recovery in Germany (and in the euro area) should gain some speed this year," Violante di Canossa, European economist at Credit Suisse noted.

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