(<space> means a literal space (U+20) and <newline> means a literal newline (\n or \r\n).)
This is a summary of the points so far.
The requested language change is to let \<space> mean the same thing as a literal space. It is currently an error.
This would mean that you could terminate a \<newline>'s skip-all-whitespace behavior and then include leading whitespace by escaping the first space with \<space> instead of using \x20. The only current way to have \n\<newline> continuation of a string and leading whitespace in the resulting string is currently to use the character-code escapes to start said whitespace.
The case that \<newline> and \<space><newline> look the same and have drastically different behavior though is a strong point against the proposed change. In order to avoid that visual ambiguity, it would have to be that \<space> would escape that space from the \<newline> gobbling of whitespace, but still error when not terminating said gobbling. This complicates the feature and makes it less intuitive (“you can escape a space” vs special cases) to avoid a visual ambiguity.
Personal opinion.
I think that un-indenting the string and just including the literal representation that you want against the left margin is the best choice currently. This is likely due to in part my dislike for visual indenting/alignment; I prefer block indenting with tabs (but don’t care enough to argue the point with an established default style).