Markit's monthly survey of consumers shows that the triple blows of rising fuel costs, the government's fiscal squeeze and faltering global growth are all eating deep into spending power.
The household finance index (HFI) dropped sharply to 34.4 in July, with 38pc feeling worse off than a month ago compared to just 6pc seeing an improvement. "The latest reading signalled that the rate of deterioration was just as severe as the survey-record seen in March 2009," said Markit.
The index, which is watched closely as a leading indicator of consumer spending, has been released ahead of the publication of Britain's gross domestic product (GDP) figures tomorrow.
City economists fear that GDP growth may have fallen below zero in the second quarter, following a lacklustre winter.
According to Markit, credit card debt and unsecured lending saw the biggest jump in over a year despite falling incomes, suggesting that growing numbers are borrowing to keep afloat.
While the richest 20pc – with incomes over £57,751 – seem serenely unaffected, the poorer section of the population is deeply worried.
Households remain hopeful that their finances will start to improve again over the next 12 months, but the immediate picture appears to validate fears that the UK economy is hovering near recession.
“A negative figure is not out of the question,” said Simon Hayes from Barclays Capital.
The relapse is a bitter disappointment for the Government and will be grist to the mill for Shadow Chancellor Ed Balls, who blames the Coalition for “reckless” budget cuts before the fragile economy is ready to take the strain.
“In the end, unless you’ve got more people in work paying taxes [and] the economy growing, it is very hard to get these deficits down. Growth is the key, that’s what Britain is badly, badly lacking now,” he told Sky News, calling for a temporary cut in VAT.
Mr Hayes said the authorities will come under further pressure to respond to these criticisms: either by a fresh blast of quantitative easing from the Bank of England or by switching to a “Plan B” at the Treasury to ease fiscal policy. “We think neither is likely and that policy-makers will sit out the current period of weakness”, he said.
The Coalition is on a fiscal knife-edge. The budget deficit has come down marginally from 10.4pc of GDP in 2009, to 9.6pc in 2010, to an estimated 8.3pc this year, but the country is still living massively beyond its means and is vulnerable to an abrupt loss of global confidence at any time – known as a “sudden stop” in market parlance – as nearly occurred before last year’s election.
“The only reason Britain has not been attacked is because the Coalition has held rock solid,” said David Bloom, currency chief at HSBC.
Michael Saunders from Citigroup said Britain is condemned by global realities to wear its hairshirt, given that this year’s deficit is likely to overshoot the £122bn estimate of the Office of Budget Responsibility by £6bn.
“There is no scope for the Chancellor to ease up on the fiscal squeeze to support growth. The IMF’s forecast suggests the structural current balance [of the budget] may still be in deficit in 2015. It will be a long journey back to fiscal sustainability and the economy requires ongoing support from the weak pound,” he said.
“Even quite modest fiscal slippage would markedly erode the credibility gained by last year’s decisive fiscal action. The cost in terms of higher Gilt yields would probably outweigh any stimulus gained.”
The full cost of Britain’s love affair with debt over the past decade is finally hitting home.
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