The Organisation for Economic Co-operation and Development (OECD) says disposable income will continue to fall in the UK in 2012.
The OECD has also revised its prediction for growth in the eurozone and says that overall its economy will contract by 0.1 per cent.
It had previously estimated that the euro area’s economy would grow by 0.2 per cent.
The OECD also warned that if the euro debt crisis escalated it could mean the economy contracts by up to two per cent.
With regard to the UK, the OECD said kept its growth forecast for 2012 at 0.5 per cent but said inflation will grow quicker than disposable incomes in both 2012 and 2013, signaling that the squeeze on UK disposable incomes is set to continue.
UK households have seen real incomes fall by 0.2 per cent in 2010 and 1.4 per cent in 2011. The OECD expects inflation in the UK to run at an average of 2.7 per cent this year and disposable incomes to rise by 1.9 per cent, suggesting 2012 incomes will fall by around 0.7 per cent.
The global policy forum for the 34 most advanced economies says that the UK can expect to see growth of just 0.9 per cent in 2013, well below the most recent estimates from both the Office for Budget Responsibility (OB) and the International Monetary Fund (IMF) of two per cent growth in 2013. Both the IMF and OBR predict the UK economy will grow by 0.8 per cent in 2012.
The OECD also called for the introduction of Eurobonds, debt issued jointly by countries within the euro, to help shore up European banks.
The forecasts indicate that both the UK and the rest of Europe are likely to lag behind growth expected in the United States. The OECD says the US will grow by 2.4 per cent in 2012 and 2.6 per cent in 2013.
OECD Chief Economist Pier Carlo Padoan said: "Today we see the situation in the euro area close to the possible downside scenario, which if materialising could lead to a severe recession in the euro area and with spillovers in the rest of the world.
“The crisis in the euro zone remains the single biggest downside risk facing the global outlook.”
The OECD’s predictions also reiterate the difference in the performance of economies in northern and southern Europe.
They predict that Germany’s economy will grow by 1.2 per cent in 2012 and two per cent in 2013 with France achieving growth of 0.6 per cent this year and 1.2 per cent next.
However, the OECD expects Greece to contract by 5.3 per cent in 2012 and Spain’s economy to shrink by 1.6 per cent in 2012 and 0.8 per cent in 2013. Italy is expected to see a contraction of 1.7 per cent this year and 0.4 per cent in 2013.
EU leaders are due to meet on Wednesday night for a summit to consider future plans to tackle the threat from the euro debt crisis.
Sign up to the Myfinances.co.uk newsletter to receive the latest financial news direct to your inbox.