German factory orders dropped by the most in more than 2 1/2 years in a sign that geopolitical tension with Russia is leaving its mark on Europe’s largest economy.

Orders, adjusted for seasonal swings and inflation, slid 3.2 percent in June from May, when they fell a revised 1.6 percent, the Economy Ministry in Berlin said today. Economists forecast an increase of 0.9 percent, according to the median of 30 estimates in a Bloomberg News survey. The decline is the steepest since September 2011.

The European Union agreed last week on its widest-ranging sanctions yet over Russia’s backing of rebels in eastern Ukraine. Germany is feeling the pain of the increasing tension, with the Bundesbank citing geopolitical concern as contributing to a probable stagnation of the economy in the second quarter. Russia counts Germany as its biggest trading partner in Europe.

“The manufacturing-sector outlook does not look encouraging,” said Evelyn Herrmann, European economist at BNP Paribas SA in London. “Geopolitical tensions, which have intensified again in July and showed in the latest set of Ifo business climate, could furthermore dampen the momentum.”

Business sentiment dropped for a third straight month in July to the lowest level since October, according to the Munich-based Ifo Institute. Investor confidence as measured by the ZEW Center for European Economic Research in Mannheim declined for a seventh month.

Blocked Contract

German Vice Chancellor Sigmar Gabriel this week blocked a deal for Rheinmetall AG to build a military training center east of Moscow in light of the sanctions. The contract has a value of more than 100 million euros ($134 million) and the Dusseldorf-based company had planned to build more facilities in Russia.

The euro fell as low as $1.3349, the weakest in almost nine months, after today’s report. It traded at $1.3363 at 9:19 a.m. in Frankfurt, down 0.1 percent.

Export orders dropped 4.1 percent in June from the previous month, including a 10.4 percent slump in the euro area, and domestic orders fell 1.9 percent, the report showed. Orders for investment goods slid 6.4 percent and those for consumer goods were down 0.4 percent. Basic-goods orders climbed 1.6 percent.

Total orders dropped 4.3 percent from a year ago. Adjusted for workdays, the decline was 2.4 percent.

“Geopolitical developments and risks more than anything led to a clear reticence in orders,” the Economy Ministry said. “It is therefore to be expected that industry develops rather moderately in coming months.”

ECB Meeting

The Bundesbank predicted in June that the German economy will expand 1.9 percent this year and 2 percent in 2015. That compares with European Central Bank forecasts for the euro area of 1 percent in 2014 and 1.7 percent next year.

ECB officials are gathering in Frankfurt today and will announce their monthly interest-rate decision tomorrow. They’ll leave the benchmark rate unchanged at a record low of 0.15 percent, according to all 57 economists in a separate Bloomberg News survey.

Mario Draghi, the ECB president, unveiled a range of measures in June to fight the threat of deflation in the currency bloc and policy makers including Governing Council member Ardo Hansson have indicated the central bank will refrain from further action until the impact of the latest stimulus is clear.

(Source: Bloomberg)