Spain crisis deepens with jobless rise

The hole in Spain's economy is getting deeper.

The government said that unemployment rose to 24.4 per cent in the first quarter - compared with 22.9 per cent in the fourth quarter - and that more than half of Spaniards under 25 are now without jobs.

The bleak employment came one day after ratings agency Standard & Poor's downgraded the country's debt.

The Spanish economy is in recession for the second time in three years as the damage from a housing bust persists. Foreclosures are rising, Spain's banks are in worse financial shape and the government's deficit is hitting worrisome levels.

The first-quarter employment data showed that 365,900 people lost their jobs, bringing the number of unemployed Spaniards to 5.6 million. The unemployment rate for people under 25 climbed to 52 per cent, up from 48.5 per cent in the previous quarter.

"The figures are terrible for everyone and terrible for the government," Foreign Minister Jose Manuel Garcia-Margallo told Spanish National Radio. "Spain is in a crisis of enormous magnitude."

The total number of unemployed increased by 729,400 compared with the first quarter of 2011. The National Statistics Institute said on Friday that Spain now has 1.7 million households in which no one has work.

The figures were another blow to the conservative government of Mariano Rajoy after Standard & Poor's late on Thursday became the first of the three leading credit rating agencies to strip Spain of an A rating. It cited a worsening budget deficit, worries over the banking system and poor economic prospects for its decision to reduce the rating by two notches from A to BBB+.

S&P even warned that a further downgrade is possible as it left its outlook assessment on Spain at negative.

Spain, the eurozone's fourth-largest economy, is now just three notches above so-called junk status. Earlier this week, the Bank of Spain confirmed that the country had entered a technical recession - two consecutive quarters of negative growth.

The country's economic problems have become the epicentre of Europe's debt crisis in recent weeks as investors worry over Spain's ability to push through austerity measures and reforms at a time of recession and mass unemployment.

The cuts are aimed principally at slashing the government's deficit from 8.5 per cent of economic output to the maximum level set by the European Union of three per cent by 2013. For this year the goal is 5.3 per cent.

With the economy shrinking and the population restless, there are concerns that the government will not meet its targets and will be forced into seeking a financial rescue as Greece, Ireland and Portugal have done before.

The difference is that Spain's economy is double the size of the combined economies of the three countries that have been bailed out. The other eurozone countries would struggle to muster enough money to rescue it.

The government later on Friday released a flurry of upbeat data on how it plans to turn the economy round between 2012-2015. Despite the dismal job numbers, it predicted a roughly balanced budget in 2016.

But there was more pain, too. De Guindos announced an increase next year in indirect taxes. He said this measure will raise 8 billion euros ($A10.23 billion) in new revenue to help chip away at a bloated deficit. At a press conference late on Friday he detailed that the increment would affect sales tax on purchases and the sale of fuel, tobacco and alcoholic drinks.

The conservative government has already raised income and property taxes, and announced cuts in spending on health care and education. The forecast is for the economy to shrink 1.7 per cent this year.

Foreseeing the economic downturn, businesses have been laying people off at a faster rate than expected, said IESE Business School economics professor Antonio Argandona. New laws also make it easier for companies to shed workers at low cost.

Argandona said Spain is not now at risk of needing a bailout because its government is still solvent. But even if the economy returns to growth next year as forecast, the jobless rate will lag behind and unemployment could hit 26 per cent.

The mood among Spanish people out on the streets on Friday was downcast.

"The situation is very bad. There's no work," said Enrique Sebastian,a 48-year-old unemployed surgery room assistant as he left one of Madrid's unemployment offices.

"The only future I see is one with wages of 400 euro a month for eight-hour days. And that's if you can find it," said Sebastian.

Markets in Spain initially reacted negatively to the twin news but soon recovered their poise alongside the rest of Europe as the downgrade was largely viewed as a belated acknowledgment of the market realities.