Riot Police stand in front of a burning barricade during Spain's general strike in Gijon
Riot Police stand in front of a burning barricade during Spain's general strike in Gijon

The downtrend in the unemployment rate of debt-stricken Spain is expected to continue in the coming months, as the deepening recession along with austerity measures likely to weigh on the labor market in the nation.

The jobless rate in the eurozone's fourth largest economy increased sharply to a new record high of 24.4 percent in the first quarter this year, the highest level in 18 years, National Statistics Institute said on Friday.

"With the deepening recession, this unfavourable trend on the job market is likely to continue over the coming quarters. The Spanish economic situation remains very challenging, with 1) a potential supply credit crunch and 2) the elevated speed of fiscal consolidation," said a note from Societe Generale Cross Asset Research.

Late Thursday, Standard & Poor's (S&P) downgraded Spain's credit rating by two notches from A to BBB+ with negative outlook, citing reasons as worsening economic outlook and increased risks for further rise in government debt.

"We believe that the Kingdom of Spain's budget trajectory will likely deteriorate against a background of economic contraction in contrast with our previous projections. At the same time, we see an increasing likelihood that Spain's government will need to provide further fiscal support to the banking sector," said S&P.

"The risk is still clearly for an increase in government debt. Some estimates put the amount of funding needed by the banks at close to €50bn," said Societe Generale.

Lowering of Spain credit rating, the second this year, could put pressure on the borrowing costs of the country, which are already at worrying levels.

"After the S&P announcement the Bono/Bund spread widened 15bp to 425bp, while the BTP/Bund spread increased 10bp to 403bp and the euro weakened. As rates at these levels will make it more difficult to raise financing in the future, the big worry is that it will not be long before Spain will join Greece, Ireland and Portugal and ask for an international bailout. This would set off a new phase of the euro crisis. Spanish debt risk remains the major risk for the euro area in the short term," Societe Generale added.

According to the Bank of Spain forecast, Spain's gross domestic product (GDP) is estimated to contract by 0.4 percent in the first quarter, suggesting that the economy entered recession for the second time since 2009.

"The government has announced deep cuts in spending that will have significant social repercussions, while the absence of growth points to little prospect of a meaningful recovery in government finances. Debt is expected to reach 84% of GDP next year, compared with 40% in 2008," said Societe Generale.