In conversations people often use "not bad". How to interpret this?
Does it depend on the context?
Yes, and to a lesser extent on intonation. I have bolded a couple of the passages in an extract from following article that addresses (amongst other phrases) "Not bad".
The article concerns British English, but there is overlap with American English. It is entitled "Euphemistically Speaking" appeared in May 2011 in The Economist. It's worth reading.
A FRIEND of mine was recently told by his boss that his position at work was "unassailable": in British office-speak that is a severe warning which has sent him hastily looking for a new job.
It reminded me of a guide I came across a few years ago, which aimed to help plain-speaking Dutch executives make sense of their English colleagues.
What the British say: "I hear what you say"
What the British mean: "I disagree and do not want to discuss it any further"
What is understood: "He accepts my point of view"
What the British say: "With the greatest respect"
What the British mean: "I think you are wrong (or a fool)"
What is understood: "He is listening to me"
What the British say: "That's not bad"
What the British mean: "That's good or very good"
What is understood: "That's poor or mediocre"
You will note the following in which the emphasis alters the meaning:
What the British say: "QUITE good" (with the stress on the "quite")
What the British mean: "A bit disappointing"
What is understood: "Quite good"
What the British say: "quite GOOD" (with the stress on the "good ")
What the British mean: "excellent"
What is understood: "Quite good"
Likewise, said with a genuine smile, or any indication of happiness, "Not bad" = excellent. Said with a degree of hesitancy = (generally) Awful, appalling, unacceptable; (health) Near death; very ill, in pain; etc.
A few more:
What the British say: "I was a bit disappointed that/It is a pity you..."
What the British mean: "I am most upset and cross"
What is understood: "It doesn't really matter"
What the British say: "Very interesting"
What the British mean: "I don't agree/I don't believe you"
What is understood: "They are impressed"
What the British say: "That is an original point of view"
What the British mean: "You must be mad, or very silly"
What is understood: "They like my ideas!"