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German business sentiment rises in September

German business sentiment unexpectedly rose in September, the Ifo Institute said on Thursday, suggesting that Europe's export engine is taking slowing Chinese growth in its stride for now.

The closely-followed Ifo business climate index rose to 108.5 from a revised 108.4 in August and was above analyst forecasts in a Reuters poll for a reading of 108.0.

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Business sentiment rose in August following progress in Greek bailout talks and appears to have weathered market volatility in recent weeks. Concerns about weak economic data from China and uncertainty about the timing of U.S. interest rate increases rattled markets in August.

"Companies assessed their current business situation slightly less favorably than in August. However, they expressed greater optimism about future business developments," the Ifo Institute said in a statement. "The German economy is proving robust."

Earlier this month, the Ifo Institute forecast Germany's current account surplus would rise to a record 250 billion euros ($280 billion) in 2015 from 216 billion euros last year, driven by a rise in trade that has been lifted by a weak euro.

The euro has declined about 12 percent against the dollar in the past year, giving euro zone exporters a competitive edge in overseas markets.

Still, German business sentiment could take a hit from an emission scandal that has embroiled car manufacturer Volkswagen this week and is expected to undermine trust in the German manufacturing sector.

Volkswagen is one of Germany's biggest employers, with more than 270,000 workers employed in the country.

Ifo economist Klaus Wohlrabe said the Volkswagen scandal broke too late to be reflected in the Ifo survey and that any negative impact would only likely be reflected in the next sentiment index, Reuters reported.

"The Ifo survey tends to lag a bit behind other surveys such as the ZEW and PMI, both of which softened in September," Jonathan Loynes, chief European economist at Capital Economics, said in a note.

"And, of course, none of the surveys will yet have picked up the impact of the VW scandal," he said. "While the economic effects will not all be negative - indeed, the recall work will presumably boost activity - it would be no surprise to see sentiment in the German industrial sector fall in the next round of surveys."

For now, markets drew support from the upbeat Ifo survey, with Germany's benchmark Dax stock index up 0.75 percent out outperforming markets in London and Paris.