Slide into economic 'black hole' will suck FTSE down towards 5,000-mark

THE FTSE is likely to plummet further towards the psychologically damaging 5,000-mark as Britain enters an economic "black hole", analysts are warning. Market traders are telling investors to brace themselves for further falls over the coming weeks after the index racked up its worst weekly loss for six years.

There are concerns that the FTSE 100, which ended a tumultuous week down almost 7% at 5,240, has not yet reached its nadir, and analysts are starting to price in further drops as the economy enters one of its bleakest periods for decades.

"I don't think the FTSE is quite in a mood yet to go up," warned Elissa Bayer, analyst at Charles Stanley. "I don't think this is a quick fix."

Peter Bickley, director of economics at Tilney Private Wealth Management, part of Deutsche Bank, said corporate earnings and dividends will take a further battering over the next nine months or so as the economy enters a short-term vacuum.

Most economists are forecasting that the UK will now enter recession. But Bickley said there is light on the horizon, and the economy will start to pick up again towards the second half of next year.

The Bank of England is expected to make a series of significant interest rate cuts as early as November as falling oil prices take the edge off inflation. Some economists are predicting rates could be as low as 3.5% in 2009.

"It's not too long before you will see it starting to fall into place and the return of the cycle to a better condition," Bickley said. "In the meantime you have got a big, black hole to get through. That's going to make an awful mess of corporate earnings and dividends over the next nine months."

Bayer said she expects financial stocks, which have taken a hammering since the start of the credit crunch, to pick up again next year, and they will take the rest of the market with them. "You are talking about the second half of next year," she said.

In the meantime, analysts are reporting an exodus from the equities market to more traditional forms of banking such as cash and bonds. Frances Hudson, strategist at Standard Life Investments, said: "Where are people putting their money? There has been an inflow into cash and bonds and outflows from the equities markets."

The FTSE 100 has lost 17.4% of its value since the start of the year, and economists are hoping the latest factory gate prices and high street sales figures, both published tomorrow, won't throw up any further nasty surprises.

The FTSE was spooked on Friday by worse than expected employment figures from the US, falling a further 2% after an already difficult week in which the pound took a nosedive against the dollar and the euro.