a full recovery of real gdp by the end of 2022 to the levels projected by staff in march. in the severe scenario, our staff projections suggest that the level of real gdp at the end of 2022 could remain 9. 6 % below the march 2020 staff projection path. in effect, both the nature of the shock and the length of the ensuing downturn make it likely that the economy will experience important structural shifts. disentangling the effects of these shifts on demand and supply, and hence on medium - term inflation, is inherently difficult. in the baseline scenario, ecb staff projections predict notable downward pressure on inflation arising from the much larger shortfall in aggregate demand than 1 / 7 bis central bankers'speeches supply. as a result, headline inflation is not anticipated to be back on its pre - covid - 19 path by 2022 in that scenario, and underlying inflation is also expected to remain subdued in the medium term ( see right chart on slide 2 ). given the unprecedented impact of the crisis on income and consumption, such disinflationary effects are not surprising. but uncertainty around these forecasts is exceptionally large : while measuring economic slack is already a challenge in normal times, it is currently exacerbated by the highly uncertain effects of the crisis on potential output, both in the short and in the medium to long run. in the short run, potential output is severely affected by disruptions in global value chains and social distancing measures, which constrain the full use of capital. think of the hairdresser who may only be able to use half of his or her physical capacity. such effects may partly offset the negative effects of weakening demand on inflation even in the short run. in the medium to long run, the impact of the crisis on potential output, and hence on inflation, will crucially depend on the response of firms and policymakers to the challenges we are currently facing. first, some sectors of the economy may never return to their previous size, requiring a large reallocation of capital and labour, also across borders. despite some progress in recent years, however, product and labour markets in the euro area still remain too rigid to accommodate the required shift in resources in a swift manner, risking permanent damage to the economy. households hit by job losses, for example, could be scarred in terms of income and human capital. temporary lay - offs and government - funded short - time work schemes have so far successfully cushioned the impact of

potentially adverse side effects. in other words, it assesses how long the “ medium term ” should be, given current circumstances. in earlier remarks, i argued that in the vicinity of the effective lower bound, attempting to shorten the horizon by further easing financial conditions carries the risk of shifting the balance of the costs and benefits of a highly accommodative monetary policy stance by increasing potential side effects. 6 at the current juncture, an important element in determining the appropriate length of the medium term is the risk of second - round effects that may entrench expectations of low inflation and thereby leave permanent scars on the euro area economy. however, this risk is mitigated by the emerging policy response in the euro area. for the first time, fiscal and monetary policy in the euro area are starting to act as true complements, thereby reinforcing each other ’ s effectiveness and paving the way for a sustainable recovery. moreover, inflation expectations by households currently signal very limited risks of second - round effects. while financial markets currently price in significant risks of deflation over the next five years ( see left chart on slide 9 ), households have adjusted their expectations in response to the pandemic very differently : the share of people that expect inflation to increase more rapidly over the course of next year has increased markedly in april, from 20 % to 36 %, and in may still accounted for 32 % ( see right chart on slide 9 ). so, given the already highly accommodative monetary policy stance, the growing complementarity between fiscal and monetary policy and the high uncertainty regarding secondround effects, our decision appears to be an appropriate and proportional course of action. the dual objective of pepp 5 / 7 bis central bankers'speeches to enhance the effectiveness of our asset purchases, the pepp has to be operationalised in a way that it meets the described dual objective. the pepp is not an interventionist programme where we stand on the sidelines when conditions are calm and enter the market only in times of market disturbances. it rather resembles a two - staged pyramid. at the basis, there is a constant flow of purchases that reaches out to all eligible market segments. in the sovereign space, these purchases are guided by the ecb ’ s capital key. this is the “ stance ” element of pepp. it seeks to create financial conditions that are consistent with our inflation aim. the upper part of the pyramid is its flexibility. this element responds to the challenges