The worst of the recession could be behind us — but the job losses are only just beginning. That was the verdict in the City today after figures showed the dominant service sector contracted less sharply than feared last month.

The Chartered Institute of Purchasing and Supply said its index of activity picked up to 42.5 in January from 40.2 in December. That was well above City forecasts of 40.4 and the highest reading since September when Lehman Brothers collapsed.

However, it was the fourth-lowest reading on record and the ninth month in a row below the 50 level that marks the cut-off between growth and decline.

There was also grim news on the jobs front as firms laid off staff at a record pace. Analysts warned that mass redundancies in the service sector — which makes up three-quarters of UK output and includes firms from banks and stockbrokers to hotels and restaurants — did not bode well for the rest of the economy.

Paul Smith, senior economist at Markit Economics, said: “While improvements in activity are encouraging and provide further tentative evidence that we may be passing through the deep point of the recession, the sector remains in a very weak state.”