German business sentiment hits 16-month high

The upswing in German business sentiment continued in August, according to data from Germany's Ifo Institute released on Tuesday.

The Ifo Business Climate index rose in August to 107.5, above expectations of 107.0 in a Reuters poll. The reading in July was 106.2.

The positive momentum was set to continue into next year, an expert at the Ifo Institute told CNBC.

"This is a positive sign that companies are starting to invest more. We think this is more than just a blip and will continue into next year," Dr. Gernot Nerb told CNBC's "Worldwide Exchange."

"Export expectations have picked up in the car and manufacturing sectors so it looks like even in some weaker European economies demand is picking up somewhat," Nerb added.

He said that the upturn would be fueled not only by the construction sector but more and more now by sectors such as engineering and the car industry.

The Ifo figures come after the latest German GDP data showed the economy grew by 0.7 percent in the second quarter.

(Read more: Euro zone exits longest recession in over 40 years)

Beat Wittmann, chief executive of TCMG Asset Management said the data confirmed a positive trend seen over the last few months and added to a recovery in domestic consumption.

"All in all I think there is a sustainable, steady but still slow trend," he told CNBC, adding that the data could have a positive effect on German equities.

The German DAX and euro fell after the news, however, and a number of economists believed it was too early to say whether the German economic recovery was meaningful or not.

Carsten Brzeski, senior economist at ING said the "great unknown" for the German growth outlook was private investment and that it was too early to tell whether the investment recovery was here to last. Meanwhile, the senior European economist at Capital Economics, Jennifer McKeown, warned that the recovery would not be rapid.