The Spanish economy contracted by 0.2% in the third quarter of the year, according to the latest economic data from the Bank of Spain. This is the first time since 1993 – 15 years ago – that Spain’s economy has shrunk, and bodes ill for its property market, which needs a booming economy to absorb the country’s property glut.

Having just been through one quarter of contraction, and with worse expected to come, Spain is on the verge of a recession, defined as 2 consecutive quarters of negative growth. Driving the Spanish economic downturn is a property market crash, a slump in domestic consumption, and, of course, the credit crunch.

As the Spanish economy slows down, unemployment is building up. Unemployment is a serious problem for the housing market, as jobless people are unlikely to buy new homes, and are very likely to default on their mortgages, despite the latest government mortgage bailout. Spanish unemployment rose by 200,000 people in September, the highest level on record, to 2.8 million, or 12.3% of those seeking work. Spain now has the highest unemployment in Europe.

As Spain’s runaway construction boom of the last decade goes off the rails, the construction sector is leading the way in job destruction, with more than 350,000 construction sector jobs lost since the start of the year. Another 800,000 building jobs are expected to go in the next 12 months or less.

With so many people losing their jobs in Spain, it is difficult to see how the property market might recover any time soon. Expect the Spanish property glut to grow and grow well into 2009.