If you Google "Panic on the streets of London" you get lots of discussion of last summer's riots in London and elsewhere, as well as links to do with the song "Panic," from which this line comes. The song connects desperation with attacks on music that "says nothing to me about my life," i.e. that lies or indulges in escapist fantasy. You might insist that it is about panic rather than despair, but the emotion in question is contrasted with the hopes that "may rise on the Grasmeres," so I think desperation or despair is a fair characterization of it. Wordsworth lived in Grasmere and (rightly) called it lovely, so there is a contrast here between the loveliness of the Lake District and the banality of town and city life (as well as the contrast between honest, or realistic, and dishonest music).
There's a similar theme in one of the songs that presumably influenced "Panic," The Fall's "Eat Y'self Fitter." (The Fall and The Smiths both come from Manchester, "Eat Y'self Fitter" was recorded just a few years before "Panic," and it contains the lyrics: "Panic in Sudan, Panic in Wardour, Panic in Granadaland [the independent television company in Manchester is/was called Granada], Panic all over," so the influence seems likely.) And The Fall have been no friends of certain aspects of modern, industrial life or dishonest music ("stars on 45 keep my pockets lined," etc). Ozzy Osbourne said that Black Sabbath were inspired by the bleakness of Birmingham (roughly: England's Detroit) in contrast with the happy, sunny music coming out of California at the time they started. It would have been dishonest for them to have been more fun. And this is reminiscent of Larkin's statement that deprivation was for him what daffodils were for Wordsworth. It's all more or less summed up in Blur's deliberately banal complaint, "modern life is rubbish." So, what's the problem and what's the solution?
The problem is more or less explained by the anthem "Jerusalem," whose words were written by William Blake. The popular ideal of England is that of a green and pleasant land. The reality is often ugly and dirty factories, warehouses, shopping malls, and the like: Blake's "dark, Satanic mills." Another version of this diagnosis is "Dirty Old Town," written about Salford, which, along with Trafford, has now merged with Manchester into one big metropolis. Ewan MacColl presents city life as contrasting with love, so that the two are almost incompatible. A place full of factories and gasworks is no place for romance. And you get similar sentiments in The Sex Pistols' singing that there's "no future in England's dreaming" and in several songs by Suede.
Blake's solution is to build a new Jerusalem in England, which is perhaps not entirely realistic. MacColl's is to cut the city down with an axe, as the Sex Pistols' is to get drunk and "destroy." Morrissey, equally pessimistically, declares that "London is dead." Suede manage to create a sort of romantic cynicism, along the lines of Oscar Wilde's idea of looking at the stars while lying in the gutter. But how anyone could live that kind of self-consciously trashy life in middle age, especially if they had children to raise, is hard to see. The Kinks, of course, offered straightforward conservatism--"what more can we do?", which sounds like an admission of defeat right away. Decades later the Libertines complained that "there's fewer more distressing sights than that/ Of an Englishman in a baseball cap" in their song "Time for Heroes." But, of course, there are no more heroes any more.